-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VfJYSQbLt59jnxragpfgAwia5xrJNXa3Nym7Wd9XE9I6/Zd6duPrqX0zfPnHnUEJ m1vE5nkdtnlw+ViGm5ijtQ== 0001085204-05-000036.txt : 20051114 0001085204-05-000036.hdr.sgml : 20051111 20051114165637 ACCESSION NUMBER: 0001085204-05-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST BANKS INC CENTRAL INDEX KEY: 0000710507 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 431175538 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31610 FILM NUMBER: 051202518 BUSINESS ADDRESS: STREET 1: 135 N MERAMEC AVE CITY: ST LOUIS STATE: MO ZIP: 63105 BUSINESS PHONE: 3148544600 MAIL ADDRESS: STREET 1: 135 N MERAMEC AVE CITY: ST LOUIS STATE: MO ZIP: 63105 10-Q 1 fbi10q93005.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ________ Commission File No. 0-20632 FIRST BANKS, INC. (Exact name of registrant as specified in its charter) MISSOURI 43-1175538 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 135 North Meramec, Clayton, Missouri 63105 (Address of principal executive offices) (Zip code) (314) 854-4600 (Registrant's telephone number, including area code) -------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- -------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X -------- -------- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No X -------- -------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Shares Outstanding Class at October 31, 2005 ----- ------------------- Common Stock, $250.00 par value 23,661
FIRST BANKS, INC. TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEETS............................................................... 1 CONSOLIDATED STATEMENTS OF INCOME......................................................... 2 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME................................................................ 3 CONSOLIDATED STATEMENTS OF CASH FLOWS..................................................... 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................ 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................................... 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................ 37 ITEM 4. CONTROLS AND PROCEDURES................................................................... 38 PART II. OTHER INFORMATION ITEM 6. EXHIBITS.................................................................................. 39 SIGNATURES............................................................................................ 40
PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS FIRST BANKS, INC. CONSOLIDATED BALANCE SHEETS (dollars expressed in thousands, except share and per share data) September 30, December 31, 2005 2004 ---- ---- (unaudited) ASSETS ------ Cash and cash equivalents: Cash and due from banks.............................................................. $ 201,321 149,605 Short-term investments............................................................... 85,808 117,505 ---------- --------- Total cash and cash equivalents................................................. 287,129 267,110 ---------- --------- Investment securities: Available for sale................................................................... 1,559,014 1,788,063 Held to maturity (fair value of $27,068 and $25,586, respectively)................... 27,066 25,286 ---------- --------- Total investment securities..................................................... 1,586,080 1,813,349 ---------- --------- Loans: Commercial, financial and agricultural............................................... 1,584,191 1,575,232 Real estate construction and development............................................. 1,421,877 1,318,413 Real estate mortgage................................................................. 3,311,471 3,061,581 Consumer and installment............................................................. 59,291 54,546 Loans held for sale.................................................................. 257,605 133,065 ---------- --------- Total loans..................................................................... 6,634,435 6,142,837 Unearned discount.................................................................... (6,625) (4,869) Allowance for loan losses............................................................ (139,471) (150,707) ---------- --------- Net loans....................................................................... 6,488,339 5,987,261 ---------- --------- Bank premises and equipment, net of accumulated depreciation and amortization............. 142,405 144,486 Goodwill.................................................................................. 166,170 156,849 Bank-owned life insurance................................................................. 110,318 106,788 Deferred income taxes..................................................................... 126,579 127,397 Other assets.............................................................................. 101,482 129,601 ---------- --------- Total assets.................................................................... $9,008,502 8,732,841 ========== ========= LIABILITIES ----------- Deposits: Noninterest-bearing demand........................................................... $1,316,287 1,194,662 Interest-bearing demand.............................................................. 926,913 875,489 Savings.............................................................................. 2,103,603 2,249,644 Time deposits of $100 or more........................................................ 1,018,055 807,220 Other time deposits.................................................................. 2,015,633 2,024,955 ---------- --------- Total deposits.................................................................. 7,380,491 7,151,970 Other borrowings.......................................................................... 568,699 594,750 Notes payable............................................................................. 80,000 15,000 Subordinated debentures................................................................... 215,433 273,300 Deferred income taxes..................................................................... 27,670 34,812 Accrued expenses and other liabilities.................................................... 64,776 62,116 Minority interest in subsidiary........................................................... 6,314 -- ---------- --------- Total liabilities............................................................... 8,343,383 8,131,948 ---------- --------- STOCKHOLDERS' EQUITY -------------------- Preferred stock: $1.00 par value, 5,000,000 shares authorized, no shares issued and outstanding....... -- -- Class A convertible, adjustable rate, $20.00 par value, 750,000 shares authorized, 641,082 shares issued and outstanding........................... 12,822 12,822 Class B adjustable rate, $1.50 par value, 200,000 shares authorized, 160,505 shares issued and outstanding.............................................. 241 241 Common stock, $250.00 par value, 25,000 shares authorized, 23,661 shares issued and outstanding................................................. 5,915 5,915 Additional paid-in capital................................................................ 5,910 5,910 Retained earnings......................................................................... 653,798 577,836 Accumulated other comprehensive loss...................................................... (13,567) (1,831) ---------- --------- Total stockholders' equity...................................................... 665,119 600,893 ---------- --------- Total liabilities and stockholders' equity...................................... $9,008,502 8,732,841 ========== ========= The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC. CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED) (dollars expressed in thousands, except share and per share data) Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------ 2005 2004 2005 2004 ---- ---- ---- ---- Interest income: Interest and fees on loans........................................... $ 109,903 86,201 303,515 254,176 Investment securities................................................ 17,057 12,784 52,001 37,098 Short-term investments............................................... 841 476 1,701 899 --------- -------- -------- -------- Total interest income........................................... 127,801 99,461 357,217 292,173 --------- -------- -------- -------- Interest expense: Deposits: Interest-bearing demand............................................ 979 801 2,799 2,592 Savings............................................................ 8,345 5,116 20,420 14,486 Time deposits of $100 or more...................................... 7,206 3,358 18,806 9,353 Other time deposits................................................ 16,832 8,636 46,967 25,296 Other borrowings..................................................... 4,946 1,982 12,480 3,383 Notes payable........................................................ 862 229 1,103 398 Subordinated debentures.............................................. 5,985 3,731 16,096 10,798 --------- -------- -------- -------- Total interest expense.......................................... 45,155 23,853 118,671 66,306 --------- -------- -------- -------- Net interest income............................................. 82,646 75,608 238,546 225,867 Provision for loan losses................................................. -- 7,500 (8,000) 23,250 --------- -------- -------- -------- Net interest income after provision for loan losses............. 82,646 68,108 246,546 202,617 --------- -------- -------- -------- Noninterest income: Service charges on deposit accounts and customer service fees........ 10,175 9,837 29,651 28,578 Gain on loans sold and held for sale................................. 6,505 4,676 17,865 12,866 Net (loss) gain on sales of available-for-sale investment securities.............................................. (3) 257 (3) 257 (Loss) gain on sales of branches, net of expenses.................... -- (20) -- 1,000 Bank-owned life insurance investment income.......................... 1,177 1,255 3,711 3,874 Investment management income......................................... 2,129 1,795 6,375 5,079 Other................................................................ 4,552 4,182 13,840 10,991 --------- -------- -------- -------- Total noninterest income........................................ 24,535 21,982 71,439 62,645 --------- -------- -------- -------- Noninterest expense: Salaries and employee benefits....................................... 35,667 29,936 103,145 85,825 Occupancy, net of rental income...................................... 5,327 4,674 15,792 13,744 Furniture and equipment.............................................. 3,960 4,099 11,798 12,802 Postage, printing and supplies....................................... 1,387 1,222 4,339 3,765 Information technology fees.......................................... 9,141 7,977 26,686 23,965 Legal, examination and professional fees............................. 2,257 1,644 6,710 4,895 Amortization of intangibles associated with the purchase of subsidiaries.................................................... 1,168 733 3,523 2,049 Communications....................................................... 495 469 1,470 1,333 Advertising and business development................................. 1,623 1,297 5,018 3,902 Charitable contributions............................................. 111 294 1,789 424 Other................................................................ 6,303 6,046 20,697 13,694 --------- -------- -------- -------- Total noninterest expense....................................... 67,439 58,391 200,967 166,398 --------- -------- -------- -------- Income before provision for income taxes and minority interest in loss of subsidiary............................... 39,742 31,699 117,018 98,864 Provision for income taxes................................................ 13,265 11,951 41,568 34,844 --------- -------- -------- -------- Income before minority interest in loss of subsidiary........... 26,477 19,748 75,450 64,020 Minority interest in loss of subsidiary................................... (1,036) -- (1,036) -- --------- -------- -------- -------- Net income...................................................... 27,513 19,748 76,486 64,020 Preferred stock dividends................................................. 196 196 524 524 --------- -------- -------- -------- Net income available to common stockholders..................... $ 27,317 19,552 75,962 63,496 ========= ======== ======== ======== Basic earnings per common share........................................... $1,154.52 826.33 3,210.44 2,683.56 ========= ======== ======== ======== Diluted earnings per common share......................................... $1,139.46 815.20 3,163.13 2,642.12 ========= ======== ======== ======== Weighted average common stock outstanding................................. 23,661 23,661 23,661 23,661 ========= ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME - (UNAUDITED) Nine Months Ended September 30, 2005 and 2004 and Three Months Ended December 31, 2004 (dollars expressed in thousands, except per share data) Accu- Adjustable Rate mulated Preferred Stock Other --------------- Compre- Total Class A Additional hensive Stock- Conver- Common Paid-In Retained Income holders' tible Class B Stock Capital Earnings (Loss) Equity ----- ------- ----- ------- -------- ------ ------ Consolidated balances, December 31, 2003............. $12,822 241 5,915 5,910 495,714 29,213 549,815 ------- Nine months ended September 30, 2004: Comprehensive income: (1) Net income..................................... -- -- -- -- 64,020 -- 64,020 Other comprehensive loss, net of tax: Unrealized losses on investment securities... -- -- -- -- -- (1,719) (1,719) Reclassification adjustment for gains included in net income............... -- -- -- -- -- (167) (167) Derivative instruments: Current period transactions................ -- -- -- -- -- (22,074) (22,074) ------- Total comprehensive income....................... 40,060 Class A preferred stock dividends, $0.80 per share................................ -- -- -- -- (513) -- (513) Class B preferred stock dividends, $0.07 per share................................ -- -- -- -- (11) -- (11) ------- --- ----- ----- ------- ------- ------- Consolidated balances, September 30, 2004............ 12,822 241 5,915 5,910 559,210 5,253 589,351 ------- Three months ended December 31, 2004: Comprehensive income: Net income..................................... -- -- -- -- 18,888 -- 18,888 Other comprehensive loss, net of tax: Unrealized losses on investment securities... -- -- -- -- -- (3,992) (3,992) Derivative instruments: Current period transactions................ -- -- -- -- -- (3,092) (3,092) ------- Total comprehensive income....................... 11,804 Class A preferred stock dividends, $0.40 per share................................ -- -- -- -- (256) -- (256) Class B preferred stock dividends, $0.04 per share................................ -- -- -- -- (6) -- (6) ------- --- ----- ----- ------- ------- ------- Consolidated balances, December 31, 2004............. 12,822 241 5,915 5,910 577,836 (1,831) 600,893 ------- Nine months ended September 30, 2005: Comprehensive income: (1) Net income..................................... -- -- -- -- 76,486 -- 76,486 Other comprehensive loss, net of tax: Unrealized losses on investment securities... -- -- -- -- -- (7,842) (7,842) Reclassification adjustment for losses included in net income.............. -- -- -- -- -- 2 2 Derivative instruments: Current period transactions................ -- -- -- -- -- (3,896) (3,896) ------- Total comprehensive income....................... 64,750 Class A preferred stock dividends, $0.80 per share................................ -- -- -- -- (513) -- (513) Class B preferred stock dividends, $0.07 per share................................ -- -- -- -- (11) -- (11) ------- --- ----- ----- ------- ------- ------- Consolidated balances, September 30, 2005............ $12,822 241 5,915 5,910 653,798 (13,567) 665,119 ======= === ===== ===== ======= ======= ======= - ------------------------- (1) Disclosure of Comprehensive Income (Loss): Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 2005 2004 2005 2004 ---- ---- ---- ---- Comprehensive income: Net income.................................................. $27,513 19,748 76,486 64,020 Other comprehensive (loss) income, net of tax: Unrealized (losses) gains on investment securities........ (4,271) 17,397 (7,842) (1,719) Reclassification adjustment for losses (gains) included in net income.................................. 2 (167) 2 (167) Derivative instruments: Current period transactions............................. (1,153) (3,379) (3,896) (22,074) ------- ------ ------ ------- Total comprehensive income.................................... $22,091 33,599 64,750 40,060 ======= ====== ====== ======= The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED) (dollars expressed in thousands) Nine Months Ended September 30, ----------------------- 2005 2004 ---- ---- Cash flows from operating activities: Net income......................................................................... $ 76,486 64,020 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization of bank premises and equipment..................... 12,895 13,921 Amortization, net of accretion................................................... 13,180 12,602 Originations and purchases of loans held for sale................................ (1,170,240) (881,860) Proceeds from sales of loans held for sale....................................... 858,586 741,108 Provision for loan losses........................................................ (8,000) 23,250 Provision for income taxes....................................................... 41,568 34,844 Payments of income taxes......................................................... (41,983) (35,480) Decrease in accrued interest receivable.......................................... 702 1,814 Interest accrued on liabilities.................................................. 118,671 66,306 Payments of interest on liabilities.............................................. (116,053) (65,603) Gain on loans sold and held for sale............................................. (17,865) (12,866) Net loss (gain) on sales of available-for-sale investment securities............. 3 (257) Gain on sales of branches, net of expenses....................................... -- (1,000) Other operating activities, net.................................................. 9,854 (5,483) Minority interest in loss of subsidiary.......................................... (1,036) -- ---------- -------- Net cash used in operating activities......................................... (223,232) (44,684) ---------- -------- Cash flows from investing activities: Cash paid for acquired entities, net of cash and cash equivalents received......... (9,500) (35,348) Proceeds from sales of investment securities available for sale.................... -- 26,340 Maturities of investment securities available for sale............................. 594,846 364,312 Maturities of investment securities held to maturity............................... 1,684 3,149 Purchases of investment securities available for sale.............................. (317,776) (503,776) Purchases of investment securities held to maturity................................ (3,508) (18,524) Net increase in loans.............................................................. (39,397) (81,606) Recoveries of loans previously charged-off......................................... 15,702 18,129 Purchases of bank premises and equipment........................................... (9,876) (4,585) Sale of minority interest in subsidiary............................................ 7,350 -- Other investing activities, net.................................................... 1,393 12,078 ---------- -------- Net cash provided by (used in) investing activities........................... 240,918 (219,831) ---------- -------- Cash flows from financing activities: (Decrease) increase in demand and savings deposits................................. (74,456) 101,615 Increase (decrease) in time deposits............................................... 107,520 (13,078) Decrease in Federal Home Loan Bank advances........................................ (6,144) (2,000) (Decrease) increase in securities sold under agreements to repurchase.............. (29,785) 248,619 Advances drawn on notes payable.................................................... 80,000 -- Repayments of notes payable........................................................ (15,000) (17,000) Proceeds from issuance of subordinated debentures.................................. -- 20,619 Payments for redemptions of subordinated debentures................................ (59,278) -- Cash paid for sales of branches, net of cash and cash equivalents sold............. -- (19,353) Payment of preferred stock dividends............................................... (524) (524) ---------- -------- Net cash provided by financing activities..................................... 2,333 318,898 ---------- -------- Net increase in cash and cash equivalents..................................... 20,019 54,383 Cash and cash equivalents, beginning of period.......................................... 267,110 213,537 ---------- -------- Cash and cash equivalents, end of period................................................ $ 287,129 267,920 ========== ======== Noncash investing and financing activities: Loans transferred to other real estate............................................. $ 2,783 4,246 ========== ======== The accompanying notes are an integral part of the consolidated financial statements.
FIRST BANKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The consolidated financial statements of First Banks, Inc. and subsidiaries (First Banks or the Company) are unaudited and should be read in conjunction with the consolidated financial statements contained in the 2004 Annual Report on Form 10-K. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles and conform to predominant practices within the banking industry. Management of First Banks has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for the interim periods presented herein, have been included. Operating results for the three and nine months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. The consolidated financial statements include the accounts of the parent company and its subsidiaries, giving effect to the minority interest in one subsidiary, as more fully described below, and in Note 2 and Note 6 to the Consolidated Financial Statements. All significant intercompany accounts and transactions have been eliminated. Certain reclassifications of 2004 amounts have been made to conform to the 2005 presentation. First Banks operates through its wholly owned subsidiary bank holding company, The San Francisco Company (SFC), headquartered in San Francisco, California, and SFC's wholly owned subsidiary bank, First Bank, headquartered in St. Louis, Missouri. First Bank operates through its branch banking offices and subsidiaries, FB Commercial Finance, Inc., Missouri Valley Partners, Inc. (MVP) and Small Business Loan Source LLC (SBLS LLC) which, except for SBLS LLC, are wholly owned subsidiaries. (2) ACQUISITIONS, INTEGRATION COSTS AND OTHER CORPORATE TRANSACTIONS Completed Acquisitions On April 29, 2005, First Banks completed its acquisition of FBA Bancorp, Inc. (FBA) and its wholly owned subsidiary, First Bank of the Americas, S.S.B. (FBOTA), for $10.5 million in cash. The acquisition served to expand First Banks' banking franchise in Chicago, Illinois. The transaction was funded through internally generated funds. FBA was headquartered in Chicago, Illinois, and through FBOTA, operated three banking offices in the southwestern Chicago metropolitan communities of Back of the Yards, Little Village and Cicero. At the time of the acquisition, FBA had assets of $73.3 million, loans, net of unearned discount, of $54.3 million, deposits of $55.7 million and stockholders' equity of $7.1 million. Goodwill, which is not deductible for tax purposes, was $2.8 million, and the core deposit intangibles, which are not deductible for tax purposes and are being amortized over seven years utilizing the straight-line method, were $1.7 million. FBA was merged with and into SFC and FBOTA was merged with and into First Bank. On September 30, 2005, First Banks completed its acquisition of International Bank of California (IBOC) for $33.7 million in cash. The acquisition served to further expand First Banks' banking franchise in Southern California, providing five additional banking offices in Los Angeles, California, including one branch in downtown Los Angeles and four branches in eastern Los Angeles County, in Alhambra, Arcadia, Artesia and Rowland Heights. The transaction was funded with a portion of the proceeds of First Banks' $100.0 million term loan, as further discussed in Note 10 to the Consolidated Financial Statements. At the time of the acquisition, IBOC had assets of $151.6 million, loans, net of unearned discount, of $113.5 million, deposits of $132.1 million and stockholders' equity of $18.6 million. The assets acquired and liabilities assumed were recorded at their estimated fair value on the acquisition date. The fair value adjustments represent current estimates and are subject to further adjustments as the valuation data is finalized. Preliminary goodwill, which is not deductible for tax purposes, was approximately $12.4 million, and the core deposit intangibles, which are not deductible for tax purposes and will be amortized over seven years utilizing the straight-line method, were approximately $3.8 million. IBOC was merged with and into First Bank. During the first quarter of 2005, First Banks recorded certain acquisition-related adjustments pertaining to its acquisition of Hillside Investors, Ltd. (Hillside) and its wholly owned banking subsidiary, CIB Bank, which was completed on November 30, 2004. Acquisition-related adjustments included additional purchase accounting adjustments necessary to appropriately adjust the preliminary goodwill of $4.3 million recorded at the time of the acquisition, which was based upon current estimates available at that time, to reflect the receipt of additional valuation data. The aggregate adjustments resulted in a purchase price reallocation among goodwill, core deposit intangibles and bank premises and equipment. The purchase price reallocation resulted in the reallocation of $3.1 million of negative goodwill to core deposit intangibles and bank premises and equipment, thereby reducing such assets by $2.8 million and $2.4 million, net of the related tax effect of $1.1 million and $941,000, respectively. Following the recognition of the acquisition-related adjustments, goodwill recorded was reduced from $4.3 million to zero and the core deposit intangibles, which are being amortized over seven years utilizing the straight-line method, were reduced from $13.4 million to $10.6 million, net of the related tax effect. The individual components of the $4.3 million acquisition-related adjustments to goodwill and the $3.1 million purchase price reallocation recorded in the first quarter of 2005 are summarized as follows: >> a $1.6 million increase in goodwill to adjust time deposits, net of the related tax effect, to their estimated fair value; >> a $967,000 increase in goodwill to adjust other real estate owned, net of the related tax effect, to its estimated fair value; >> a $10.0 million reduction in goodwill to adjust loans held for sale, net of the related tax effect, to their estimated fair value. These adjustments were based upon the receipt of loan payoffs and significantly higher sales prices received over the original third-party bid estimates, for certain loans held for sale. All of the acquired nonperforming loans that had been held for sale as of December 31, 2004 had either been sold or repaid as of March 31, 2005, with the exception of one credit relationship, which was subsequently sold in April 2005; >> a $1.7 million increase in goodwill, net of the related tax effect, and a related decrease in core deposit intangibles of $2.8 million, resulting from the purchase price reallocation; and >> a $1.4 million increase in goodwill, net of the related tax effect, and a related decrease in bank premises and equipment of $2.4 million, resulting from the purchase price reallocation. Pending Acquisitions On April 27, 2005, First Banks executed an Agreement and Plan of Reorganization providing for the acquisition of Northway State Bank (NSB) for $10.3 million in cash. NSB was headquartered in Grayslake, Illinois, and operated one banking office located in Lake County in the northern Chicago metropolitan area. As further described in Note 13 to the Consolidated Financial Statements, First Banks completed its acquisition of NSB on October 31, 2005. As previously announced on August 22, 2005, First Banks entered into an Agreement and Plan of Reorganization, which was restated as a Stock Purchase Agreement with certain shareholders of First National Bank of Sachse (FNBS) on October 28, 2005, that provides for First Banks to acquire approximately 85% of the outstanding common stock of FNBS for $45.62 per share. FNBS operates one banking office located in Sachse, Texas, which is located approximately 20 miles northeast of the Dallas metropolitan area. At September 30, 2005, FNBS reported assets of approximately $72.2 million, loans, net of unearned discount, of approximately $53.0 million, deposits of approximately $61.3 million and stockholders' equity of approximately $9.7 million. The transaction, which is subject to regulatory approvals and the approval of FNBS's shareholders, is expected to be completed by the first quarter of 2006. Other Corporate Transactions SBLS LLC, a Nevada-based limited liability company and subsidiary of First Bank, purchased substantially all of the assets and assumed certain liabilities of Small Business Loan Source, Inc. (SBLS), headquartered in Houston, Texas, in exchange for cash and certain payments contingent on future valuations of specifically identified assets, including servicing assets and retained interests in securitizations, on August 31, 2004. In conjunction with this transaction, First Bank granted to First Capital America, Inc. (FCA), a corporation owned by First Banks' Chairman and members of his immediate family, an option to purchase Membership Interests of SBLS LLC. FCA exercised this option on June 30, 2005 and paid First Bank $7.4 million in cash. As a result of this transaction, SBLS LLC became 51.0% owned by First Bank and 49.0% owned by FCA, and accordingly, FCA's ownership interest is recognized as minority interest in subsidiary in the consolidated balance sheets and the related minority interest in income or loss of subsidiary is recognized in the consolidated statements of income. On January 18, 2005, First Bank opened a de novo branch office in Farmington, Missouri, and on March 25, 2005, First Bank completed the merger of two branch offices in Hillside, located in the Chicago, Illinois metropolitan area. On September 23, 2005, First Bank completed its assumption of the deposit liabilities of the Roodhouse, Illinois branch office of Bank and Trust Company, an Illinois commercial bank, for $100,000 in cash. At the time of assumption, the deposit liabilities of the Roodhouse branch office were $5.1 million. The core deposit intangibles, which are deductible for tax purposes and are being amortized over seven years utilizing the straight-line method, were $100,000. Acquisition and Integration Costs First Banks accrues certain costs associated with its acquisitions as of the respective consummation dates. The accrued costs relate to adjustments to the staffing levels of the acquired entities or to the anticipated termination of information technology or item processing contracts of the acquired entities prior to their stated contractual expiration dates. The most significant costs that First Banks incurs relate to salary continuation agreements, or other similar agreements, of executive management and certain other employees of the acquired entities that were in place prior to the acquisition dates. These agreements provide for payments over periods ranging from three months to 15 years and are triggered as a result of the change in control of the acquired entity. Other severance benefits for employees that are terminated in conjunction with the integration of the acquired entities into First Banks' existing operations are normally paid to the recipients within 90 days of the respective consummation date and are expensed in the consolidated statements of income as incurred. The accrued severance balance of $665,000, as summarized in the following table, is comprised of contractual obligations under salary continuation agreements to seven individuals with remaining terms ranging from approximately three months to 11 years. As the obligation to make payments under these agreements is accrued at the consummation date, such payments do not have any impact on the consolidated statements of income. First Banks also incurs costs associated with acquisitions that are expensed in the consolidated statements of income. These costs relate principally to additional costs incurred in conjunction with the information technology conversions of the respective entities. A summary of the cumulative acquisition and integration costs attributable to the Company's acquisitions, which were accrued as of the consummation dates of the respective acquisition, is listed below. These acquisition and integration costs are reflected in accrued and other liabilities in the consolidated balance sheets.
Information Severance Technology Fees Total --------- --------------- ----- (dollars expressed in thousands) Balance at December 31, 2004.................................. $ 761 -- 761 Nine Months Ended September 30, 2005: Amounts accrued at acquisition date......................... 588 916 1,504 Payments.................................................... (684) (127) (811) ------ ----- ------ Balance at September 30, 2005................................. $ 665 789 1,454 ====== ===== ====== (3) INTANGIBLE ASSETS ASSOCIATED WITH THE PURCHASE OF SUBSIDIARIES AND BRANCH OFFICES Intangible assets associated with the purchase of subsidiaries and branch offices, net of amortization, were comprised of the following at September 30, 2005 and December 31, 2004: September 30, 2005 December 31, 2004 ------------------------ ----------------------- Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount Amortization ------ ------------ ------ ------------ (dollars expressed in thousands) Amortized intangible assets: Core deposit intangibles.................... $ 35,646 (10,419) 32,823 (7,003) Goodwill associated with purchases of branch offices............... 2,210 (1,110) 2,210 (1,003) -------- ------- ------- ------- Total.................................. $ 37,856 (11,529) 35,033 (8,006) ======== ======= ======= ======= Unamortized intangible assets: Goodwill associated with the purchase of subsidiaries.................. $165,070 155,642 ======== =======
Amortization of intangibles associated with the purchase of subsidiaries and branch offices was $1.2 million and $3.5 million for the three and nine months ended September 30, 2005, respectively, and $733,000 and $2.0 million for the comparable periods in 2004. Amortization of intangibles associated with the purchase of subsidiaries, including amortization of core deposit intangibles and goodwill associated with branch office purchases, has been estimated in the following table, and does not take into consideration any pending or potential future acquisitions or branch office purchases.
(dollars expressed in thousands) Year ending December 31: 2005 remaining...................................................... $ 1,305 2006................................................................ 5,220 2007................................................................ 5,220 2008................................................................ 5,220 2009 ............................................................... 3,316 2010 ............................................................... 2,856 Thereafter.......................................................... 3,190 -------- Total.......................................................... $ 26,327 ========
Changes in the carrying amount of goodwill for the three and nine months ended September 30, 2005 and 2004 were as follows:
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2005 2004 2005 2004 ---- ---- ---- ---- (dollars expressed in thousands) Balance, beginning of period......................... $154,664 145,255 156,849 145,548 Goodwill acquired during period...................... 12,969 6,564 15,186 6,564 Acquisition-related adjustments (1) (2).............. (1,427) -- (5,758) (222) Amortization - purchases of branch offices........... (36) (36) (107) (107) -------- -------- -------- -------- Balance, end of period............................... $166,170 151,783 166,170 151,783 ======== ======== ======== ======== ------------------ (1) Acquisition-related adjustments of $4.3 million recorded in the first quarter of 2005 pertain to the acquisition of CIB Bank, as further described in Note 2 to the Consolidated Financial Statements. (2) Acquisition-related adjustments of $1.4 million recorded in the third quarter of 2005 pertain to the acquisition of Continental Mortgage Corporation - Delaware.
(4) SERVICING RIGHTS Mortgage Banking Activities. At September 30, 2005 and December 31, 2004, First Banks serviced mortgage loans for others amounting to $1.02 billion and $1.06 billion, respectively. Changes in mortgage servicing rights, net of amortization, for the three and nine months ended September 30, 2005 and 2004 were as follows:
Three Months Ended Nine Months Ended September 30, September 30, -------------------- --------------------- 2005 2004 2005 2004 ---- ---- ---- ---- (dollars expressed in thousands) Balance, beginning of period........................ $ 8,502 12,533 10,242 15,408 Servicing rights acquired during the period......... -- -- 435 -- Originated servicing rights......................... 256 345 657 1,164 Amortization........................................ (1,261) (1,498) (3,837) (5,192) ------- ------- ------- ------- Balance, end of period.............................. $ 7,497 11,380 7,497 11,380 ======= ======= ======= =======
The fair value of mortgage servicing rights was approximately $13.2 million and $16.8 million at September 30, 2005 and 2004, respectively, and $14.6 million at December 31, 2004. The excess of the fair value of mortgage servicing rights over the carrying value was approximately $5.7 million and $5.4 million at September 30, 2005 and 2004, respectively, and $4.4 million at December 31, 2004. First Banks did not incur any impairment of mortgage servicing rights during the three and nine months ended September 30, 2005 and 2004. Amortization of mortgage servicing rights at September 30, 2005 has been estimated in the following table:
(dollars expressed in thousands) Year ending December 31: 2005 remaining...................................................... $ 942 2006................................................................ 3,286 2007................................................................ 2,000 2008................................................................ 863 2009................................................................ 317 2010................................................................ 89 ------- Total.......................................................... $ 7,497 =======
Other Servicing Activities. At September 30, 2005 and December 31, 2004, First Banks serviced United States Small Business Administration (SBA) loans for others amounting to $170.1 million and $174.7 million, respectively. Changes in SBA servicing rights, net of amortization, for the three and nine months ended September 30, 2005 were as follows:
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ------------------- 2005 2004 2005 2004 ---- ---- ---- ---- (dollars expressed in thousands) Balance, beginning of period........................ $12,351 -- 13,013 -- Servicing rights acquired during the period......... -- 15,076 -- 15,076 Originated servicing rights......................... 393 -- 932 -- Amortization........................................ (576) (163) (1,777) (163) Impairment valuation allowance...................... (2,359) -- (2,359) -- ------- ------ ------ ------ Balance, end of period.............................. $ 9,809 14,913 9,809 14,913 ======= ====== ====== ======
The fair value of SBA servicing rights was approximately $10.1 million and $14.9 million at September 30, 2005 and 2004, respectively, and $13.0 million at December 31, 2004. The excess of the fair value of SBA servicing rights over the carrying value was approximately $297,000 at September 30, 2005. The fair value of SBA servicing rights approximated the carrying values of $13.0 million and $14.9 million at December 31, 2004 and September 30, 2004, respectively. First Banks recognized impairment of $2.4 million for the three and nine months ended September 30, 2005 resulting from a decline in the fair value of the SBA servicing assets below the carrying value following substantial damage to several shrimping vessels within the servicing portfolio caused by the effects of Hurricane Katrina. Amortization of SBA servicing rights at September 30, 2005 has been estimated in the following table:
(dollars expressed in thousands) Year ending December 31: 2005 remaining...................................................... $ 449 2006................................................................ 1,607 2007................................................................ 1,357 2008................................................................ 1,143 2009................................................................ 960 2010................................................................ 805 Thereafter.......................................................... 3,488 ------- Total.......................................................... $ 9,809 =======
(5) EARNINGS PER COMMON SHARE The following is a reconciliation of the basic and diluted earnings per share computations for the three and nine months ended September 30, 2005 and 2004:
Income Shares Per Share (numerator) (denominator) Amount ----------- ------------- ------ (dollars in thousands, except share and per share data) Three months ended September 30, 2005: Basic EPS - income available to common stockholders............. $ 27,317 23,661 $ 1,154.52 Effect of dilutive securities: Class A convertible preferred stock........................... 192 481 (15.06) -------- ------- ---------- Diluted EPS - income available to common stockholders........... $ 27,509 24,142 $ 1,139.46 ======== ======= ========== Three months ended September 30, 2004: Basic EPS - income available to common stockholders............. $ 19,552 23,661 $ 826.33 Effect of dilutive securities: Class A convertible preferred stock........................... 192 559 (11.13) -------- ------- ---------- Diluted EPS - income available to common stockholders........... $ 19,744 24,220 $ 815.20 ======== ======= ========== Nine months ended September 30, 2005: Basic EPS - income available to common stockholders............. $ 75,962 23,661 $ 3,210.44 Effect of dilutive securities: Class A convertible preferred stock........................... 513 516 (47.31) -------- ------- ---------- Diluted EPS - income available to common stockholders........... $ 76,475 24,177 $ 3,163.13 ======== ======= ========== Nine months ended September 30, 2004: Basic EPS - income available to common stockholders............. $ 63,496 23,661 $ 2,683.56 Effect of dilutive securities: Class A convertible preferred stock........................... 513 565 (41.44) -------- ------- ---------- Diluted EPS - income available to common stockholders........... $ 64,009 24,226 $ 2,642.12 ======== ======= ==========
(6) TRANSACTIONS WITH RELATED PARTIES First Services, L.P., a limited partnership indirectly owned by First Banks' Chairman and members of his immediate family, provides information technology, item processing and various related services to First Banks, Inc. and its subsidiaries. Fees paid under agreements with First Services, L.P. were $7.6 million and $22.3 million for the three and nine months ended September 30, 2005, respectively, and $6.7 million and $19.9 million for the comparable periods in 2004. First Services, L.P. leases information technology and other equipment from First Bank. During the three months ended September 30, 2005 and 2004, First Services, L.P. paid First Bank $1.1 million and $1.0 million, respectively, and during the nine months ended September 30, 2005 and 2004, First Services, L.P. paid First Bank $3.3 million and $3.2 million, respectively, in rental fees for the use of that equipment. First Brokerage America, L.L.C., a limited liability company indirectly owned by First Banks' Chairman and members of his immediate family, received approximately $529,000 and $1.8 million for the three and nine months ended September 30, 2005, respectively, and $870,000 and $2.6 million for the comparable periods in 2004, in commissions paid by unaffiliated third-party companies. The commissions received were primarily in connection with the sales of annuities, securities and other insurance products to customers of First Bank. First Title Guaranty LLC (First Title), a limited liability company established and administered by and for the benefit of First Banks' Chairman and members of his immediate family, received approximately $98,000 and $281,000 for the three and nine months ended September 30, 2005, respectively, and $100,000 and $304,000 for the comparable periods in 2004, in commissions for policies purchased by First Banks or customers of First Bank from unaffiliated, third-party insurers. The insurance premiums on which these commissions were earned were competitively bid, and First Banks deems the commissions First Title earned from unaffiliated third-party companies to be comparable to those that would have been earned by an unaffiliated third-party agent. First Bank leases certain of its in-store branch offices and ATM sites from Dierbergs Markets, Inc., a grocery store chain headquartered in St. Louis, Missouri that is owned and operated by the brother of First Banks' Chairman and members of his immediate family. Total rent expense incurred by First Bank under the lease obligation contracts was $72,000 and $237,000 for the three and nine months ended September 30, 2005, respectively, and $68,000 and $214,000 for the comparable periods in 2004. First Bank has had in the past, and may have in the future, loan transactions in the ordinary course of business with its directors or affiliates. These loan transactions have been on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons and did not involve more than the normal risk of collectibility or present other unfavorable features. Loans to directors, their affiliates and executive officers of First Banks, Inc. were approximately $33.4 million and $31.0 million at September 30, 2005 and December 31, 2004, respectively. First Bank does not extend credit to its officers or to officers of First Banks, Inc., except extensions of credit secured by mortgages on personal residences, loans to purchase automobiles, personal credit card accounts and deposit account overdraft protection under a plan whereby a credit limit has been established in accordance with First Bank's standard credit criteria. On August 30, 2004, First Bank granted to FCA, a corporation owned by First Banks' Chairman and members of his immediate family, a written option to purchase 735 Membership Interests of SBLS LLC, a wholly owned limited liability company of First Bank, at a price of $10,000 per Membership Interest, or $7.4 million in aggregate. The option could have been exercised by FCA at any time prior to its expiration, which was extended to June 30, 2005. On June 30, 2005, FCA exercised this option and paid First Bank $7.4 million in cash. Consequently, SBLS LLC became 51.0% owned by First Bank and 49% owned by FCA as of June 30, 2005. On June 30, 2005, SBLS LLC executed a Multi-Party Agreement by and among SBLS LLC, First Bank, Colson Services Corp., fiscal transfer agent for the SBA, and the SBA, in addition to a Loan and Security Agreement by and among First Bank and the SBA (collectively, the Agreement) that provides a warehouse line of credit for loan funding purposes. The Agreement provides for a maximum credit line of $50.0 million and has an initial term of three years with a maturity date of June 30, 2008. At the end of the first year, First Bank, at its option, may extend the existing maturity date by one additional year, subject to certain conditions. Interest is payable monthly, in arrears, on the outstanding balances at a rate equal to First Bank's prime lending rate. Advances under the Agreement are secured by the assignment of the majority of the assets of SBLS LLC. The balance of advances outstanding under this line of credit was $31.9 million at September 30, 2005. Interest expense recorded under the Agreement since its inception on June 30, 2005 was $518,000. On August 5, 2005, First Bank entered into a contract with World Wide Technology, Inc. (WWT), a wholly owned subsidiary of World Wide Technology Holding Co., Inc. (WWTHC). WWTHC is an electronic procurement and logistics company in the information technology industry headquartered in St. Louis, Missouri. The contract provides for WWT to provide information technology services associated with the deployment of personal computers to First Bank employees in an effort to further modernize the technological infrastructure throughout the First Bank branch banking network. Mr. David L. Steward, a director of First Banks and a member of the Audit Committee of First Banks, serves as the Chairman of the Board of Directors of WWTHC. The Audit Committee of First Banks reviewed and approved the utilization of WWT for information technology services with fees not to exceed $500,000 for the year ending December 31, 2005. As of September 30, 2005, First Bank had made payments of $3,000 under the contract. (7) REGULATORY CAPITAL First Banks and First Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on First Banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Banks and First Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require First Banks and First Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets, and of Tier I capital to average assets. Management believes, as of September 30, 2005, First Banks and First Bank were each well capitalized. As of September 30, 2005, the most recent notification from First Banks' primary regulator categorized First Banks and First Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, First Banks and First Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. At September 30, 2005 and December 31, 2004, First Banks' and First Bank's required and actual capital ratios were as follows:
Actual For To Be Well --------------------------- Capital Capitalized Under September 30, December 31, Adequacy Prompt Corrective 2005 2004 Purposes Action Provisions ---- ---- -------- ----------------- Total capital (to risk-weighted assets): First Banks..................................... 10.31% 10.61% 8.0% 10.0% First Bank...................................... 10.92 10.73 8.0 10.0 Tier 1 capital (to risk-weighted assets): First Banks..................................... 9.06 8.43 4.0 6.0 First Bank...................................... 9.66 9.47 4.0 6.0 Tier 1 capital (to average assets): First Banks..................................... 8.12 7.89 3.0 5.0 First Bank...................................... 8.67 8.86 3.0 5.0
On March 1, 2005, the Board of Governors of the Federal Reserve System (Board) adopted a final rule, Risk-Based Capital Standards: Trust Preferred Securities and the Definition of Capital, which allows for the continued limited inclusion of trust preferred securities in Tier 1 capital. The Board's final rule limits restricted core capital elements to 25% of the sum of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. Amounts of restricted core capital elements in excess of these limits may generally be included in Tier 2 capital. Specifically, amounts of qualifying trust preferred securities and cumulative perpetual preferred stock in excess of the 25% limit may be included in Tier 2 capital, but will be limited, together with subordinated debt and limited-life preferred stock, to 50% of Tier 1 capital. In addition, the final rule provides that in the last five years before the maturity of the underlying subordinated note, the outstanding amount of the associated trust preferred securities is excluded from Tier 1 capital and included in Tier 2 capital, subject to one-fifth amortization per year. The final rule provides for a five-year transition period, ending March 31, 2009, for the application of the quantitative limits. Until March 31, 2009, the aggregate amount of qualifying cumulative perpetual preferred stock and qualifying trust preferred securities that may be included in Tier 1 capital is limited to 25% of the sum of the following core capital elements: qualifying common stockholders' equity, qualifying noncumulative and cumulative perpetual preferred stock, qualifying minority interest in the equity accounts of consolidated subsidiaries and qualifying trust preferred securities. First Banks has evaluated the impact of the final rule on the Company's financial condition and results of operations, and determined the implementation of the Board's final rules that will be effective in March 2009 would reduce First Banks' Tier 1 capital (to risk-weighted assets) and Tier 1 capital (to average assets) to 8.54% and 7.66%, respectively, as of September 30, 2005. On October 6, 2005, the Board, in conjunction with various other regulatory agencies, announced plans to consider various proposed revisions to U.S. risk-based capital standards that would enhance risk sensitivity of the existing framework. The comment period ends in 90 days. (8) BUSINESS SEGMENT RESULTS First Banks' business segment is First Bank. The reportable business segment is consistent with the management structure of First Banks, First Bank and the internal reporting system that monitors performance. First Bank provides similar products and services in its defined geographic areas through its branch network. The products and services offered include a broad range of commercial and personal deposit products, including demand, savings, money market and time deposit accounts. In addition, First Bank markets combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. First Bank also offers both consumer and commercial loans. Consumer lending includes residential real estate, home equity and installment lending. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans, asset-based loans and trade financing. Other financial services include mortgage banking, debit cards, brokerage services, credit-related insurance, internet banking, automated teller machines, telephone banking, safe deposit boxes and trust, private banking and institutional money management services. The revenues generated by First Bank consist primarily of interest income, generated from the loan and investment security portfolios, and service charges and fees, generated from the deposit products and services. The geographic areas include eastern Missouri, Illinois, including Chicago, southern and northern California, and Houston, Dallas, Irving, McKinney and Denton, Texas. The products and services are offered to customers primarily within First Banks' respective geographic areas. The business segment results are consistent with First Banks' internal reporting system and, in all material respects, with U.S. generally accepted accounting principles and practices predominant in the banking industry. The business segment results are summarized as follows:
Corporate, Other and Intercompany First Bank Reclassifications (1) Consolidated Totals --------------------------- --------------------------- ---------------------------- September 30, December 31, September 30, December 31, September 30, December 31, 2005 2004 2005 2004 2005 2004 ---- ---- ---- ---- ---- ---- (dollars expressed in thousands) Balance sheet information: Investment securities................... $1,575,720 1,803,454 10,360 9,895 1,586,080 1,813,349 Loans, net of unearned discount......... 6,627,810 6,137,968 -- -- 6,627,810 6,137,968 Goodwill................................ 166,170 156,849 -- -- 166,170 156,849 Total assets............................ 8,995,185 8,720,331 13,317 12,510 9,008,502 8,732,841 Deposits................................ 7,416,505 7,161,636 (36,014) (9,666) 7,380,491 7,151,970 Notes payable........................... -- -- 80,000 15,000 80,000 15,000 Subordinated debentures................. -- -- 215,433 273,300 215,433 273,300 Stockholders' equity.................... 922,437 877,473 (257,318) (276,580) 665,119 600,893 ========== ========= ======== ======== ========= ========= Corporate, Other and Intercompany First Bank Reclassifications (1) Consolidated Totals ------------------------ ---------------------- ----------------------- Three Months Ended Three Months Ended Three Months Ended September 30, September 30, September 30, ------------------------ ---------------------- ----------------------- 2005 2004 2005 2004 2005 2004 ---- ---- ---- ---- ---- ---- (dollars expressed in thousands) Income statement information: Interest income......................... $ 127,612 99,311 189 150 127,801 99,461 Interest expense........................ 38,419 19,916 6,736 3,937 45,155 23,853 ---------- --------- -------- -------- --------- --------- Net interest income................ 89,193 79,395 (6,547) (3,787) 82,646 75,608 Provision for loan losses............... -- 7,500 -- -- -- 7,500 ---------- --------- -------- -------- --------- --------- Net interest income after provision for loan losses........ 89,193 71,895 (6,547) (3,787) 82,646 68,108 ---------- --------- -------- -------- --------- --------- Noninterest income...................... 24,739 22,133 (204) (151) 24,535 21,982 Noninterest expense..................... 65,773 57,398 1,666 993 67,439 58,391 ---------- --------- -------- -------- --------- --------- Income before provision for income taxes and minority interest in loss of subsidiary............ 48,159 36,630 (8,417) (4,931) 39,742 31,699 Provision for income taxes.............. 16,206 13,663 (2,941) (1,712) 13,265 11,951 ---------- --------- -------- -------- --------- --------- Income before minority interest in loss of subsidiary............ 31,953 22,967 (5,476) (3,219) 26,477 19,748 Minority interest in loss of subsidiary. (1,036) -- -- -- (1,036) -- ---------- --------- -------- -------- --------- --------- Net income......................... $ 32,989 22,967 (5,476) (3,219) 27,513 19,748 ========== ========= ======== ======== ========= ========= Corporate, Other and Intercompany First Bank Reclassifications (1) Consolidated Totals ------------------------ ---------------------- ----------------------- Nine Months Ended Nine Months Ended Nine Months Ended September 30, September 30, September 30, ------------------------ ---------------------- ----------------------- 2005 2004 2005 2004 2005 2004 ---- ---- ---- ---- ---- ---- (dollars expressed in thousands) Income statement information: Interest income......................... $ 356,682 291,744 535 429 357,217 292,173 Interest expense........................ 101,615 55,162 17,056 11,144 118,671 66,306 ---------- --------- -------- -------- --------- --------- Net interest income................ 255,067 236,582 (16,521) (10,715) 238,546 225,867 Provision for loan losses............... (8,000) 23,250 -- -- (8,000) 23,250 ---------- --------- -------- -------- --------- --------- Net interest income after provision for loan losses........ 263,067 213,332 (16,521) (10,715) 246,546 202,617 ---------- --------- -------- -------- --------- --------- Noninterest income...................... 72,079 63,102 (640) (457) 71,439 62,645 Noninterest expense..................... 197,016 163,303 3,951 3,095 200,967 166,398 ---------- --------- -------- -------- --------- --------- Income before provision for income taxes and minority interest in loss of subsidiary... 138,130 113,131 (21,112) (14,267) 117,018 98,864 Provision for income taxes.............. 48,940 42,613 (7,372) (7,769) 41,568 34,844 ---------- --------- -------- -------- --------- --------- Income before minority interest in loss of subsidiary............ 89,190 70,518 (13,740) (6,498) 75,450 64,020 Minority interest in loss of subsidiary. (1,036) -- -- -- (1,036) -- ---------- --------- -------- -------- --------- --------- Net income......................... $ 90,226 70,518 (13,740) (6,498) 76,486 64,020 ========== ========= ======== ======== ========= ========= - ------------------ (1) Corporate and other includes $3.9 million and $2.4 million of interest expense on subordinated debentures, after applicable income tax benefit of $2.1 million and $1.3 million, for the three months ended September 30, 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, corporate and other includes $10.5 million and $7.0 million of interest expense on subordinated debentures, after applicable income tax benefits of $5.6 million and $3.8 million, respectively.
(9) OTHER BORROWINGS Other borrowings were comprised of the following at September 30, 2005 and December 31, 2004:
September 30, December 31, 2005 2004 -------------- ------------ (dollars expressed in thousands) Securities sold under agreements to repurchase: Daily............................................................... $ 179,321 209,106 Term................................................................ 350,000 350,000 FHLB advances............................................................ 39,300 35,644 Fed funds purchased...................................................... 78 -- --------- ------- Total other borrowings.......................................... $ 568,699 594,750 ========= =======
In accordance with the Company's interest rate risk management program, First Bank modified its term repurchase agreements under master repurchase agreements with unaffiliated third parties on March 21, 2005 to terminate the interest rate cap agreements previously embedded within the agreements and simultaneously enter into interest rate floor agreements, also embedded within the agreements. These modifications resulted in adjustments to the interest rate spread to LIBOR for the agreements, as set forth in the following table. The modified terms of the repurchase agreements became effective immediately following the respective quarterly scheduled interest payment dates that occurred during the second quarter of 2005. First Bank did not incur any costs in conjunction with the modifications of the agreements. The maturity dates, par amounts, interest rate spreads and interest rate floor/cap strike prices on First Bank's term repurchase agreements as of September 30, 2005 and December 31, 2004 were as follows:
Par Interest Rate Interest Rate Floor/ Maturity Date Amount Spread (1)(2) Cap Strike Price (1)(2) ------------- ------ --------------- ----------------------- (dollars expressed in thousands) September 30, 2005: August 15, 2006................................. $ 50,000 LIBOR + 0.4600% 3.00% / Floor January 12, 2007................................ 150,000 LIBOR + 0.0050% 3.00% / Floor June 14, 2007................................... 50,000 LIBOR - 0.3300% 3.00% / Floor June 14, 2007................................... 50,000 LIBOR - 0.3400% 3.00% / Floor August 1, 2007.................................. 50,000 LIBOR + 0.0800% 3.00% / Floor --------- $ 350,000 ========= December 31, 2004: August 15, 2006................................. $ 50,000 LIBOR - 0.8250% 3.00% / Cap January 12, 2007................................ 150,000 LIBOR - 0.8350% 3.50% / Cap June 14, 2007................................... 50,000 LIBOR - 0.6000% 5.00% / Cap June 14, 2007................................... 50,000 LIBOR - 0.6100% 5.00% / Cap August 1, 2007.................................. 50,000 LIBOR - 0.9150% 3.50% / Cap --------- $ 350,000 ========= ------------------------- (1) As of September 30, 2005, the interest rates paid on the term repurchase agreements were based on the three-month London Interbank Offering Rate reset in arrears plus or minus the spread amount shown above minus a floating amount equal to the differential between the three-month London Interbank Offering Rate reset in arrears and the strike price shown above, if the three-month London Interbank Offering Rate reset in arrears falls below the strike price associated with the interest rate floor agreements. (2) As of December 31, 2004, the interest rates paid on the term repurchase agreements were based on the three-month London Interbank Offering Rate reset in arrears minus the spread amount shown above plus a floating amount equal to the differential between the three-month London Interbank Offering Rate reset in arrears and the strike price shown above, if the three-month London Interbank Offering Rate reset in arrears exceeded the strike price associated with the interest rate cap agreements.
(10) NOTES PAYABLE On August 11, 2005, First Banks entered into an Amended and Restated Secured Credit Agreement with a group of unaffiliated financial institutions (Credit Agreement) in the amount of $122.5 million. The Credit Agreement replaced a secured credit agreement dated August 14, 2003, and subsequently amended on August 12, 2004, that provided a $75.0 million revolving credit line and a $25.0 million letter of credit facility. The Credit Agreement contains material changes to the structure and terms of the financing arrangement, the most significant of which is the addition of a term loan. The Credit Agreement provides a $15.0 million revolving credit facility (Revolving Credit), a $7.5 million letter of credit facility (LC Facility) and a $100.0 million term loan facility (Term Loan). Interest is payable on outstanding principal loan balances of the Revolving Credit at a floating rate equal to either the lender's prime rate or, at First Banks' option, the London Interbank Offering Rate (Eurodollar Rate) plus a margin determined by the outstanding loan balances and First Banks' net income for the preceding four calendar quarters. If the loan balances outstanding under the Revolving Credit are accruing at the prime rate, interest is paid monthly. If the loan balances outstanding under the Revolving Credit are accruing at the Eurodollar Rate, interest is payable based on the one, two, three or six-month Eurodollar Rate, as selected by First Banks. Interest is payable on outstanding principal loan balances of the Term Loan at a floating rate equal to the Eurodollar Rate plus a margin determined by the outstanding loan balances and First Banks' net income for the preceding four calendar quarters. There were no amounts borrowed on the Revolving Credit on August 11, 2005. First Banks borrowed $80.0 million on the Term Loan on August 11, 2005 and borrowed the remaining $20.0 million on November 14, 2005, as further described in Note 13 to the Consolidated Financial Statements. The outstanding principal balance of the Term Loan is payable in ten equal quarterly installments of $5.0 million commencing on March 31, 2006, with the remainder of the Term Loan balance to be repaid in full, including any unpaid interest, upon maturity on August 10, 2008. Amounts may be borrowed under the Revolving Credit until August 10, 2006, at which time the principal and interest outstanding is due and payable. The Credit Agreement requires maintenance of certain minimum capital ratios for First Banks and First Bank, certain maximum nonperforming assets ratios for First Bank and a minimum return on assets ratio for First Banks. In addition, it contains additional covenants, including a limitation on the amount of dividends on First Banks' common stock that may be paid to stockholders. The Credit Agreement is secured by First Banks' ownership interest in the capital stock of its subsidiaries. Letters of credit issued to unaffiliated third parties on behalf of First Banks under the LC Facility were $3.7 million and $6.3 million at September 30, 2005 and December 31, 2004, respectively, and had not been drawn on by the counterparties. Notes payable were comprised of the following at September 30, 2005 and December 31, 2004:
September 30, December 31, 2005 2004 ------------- ------------ (dollars expressed in thousands) Revolving credit......................................................... $ -- 15,000 Term loan................................................................ 80,000 -- -------- ------- Total notes payable............................................. $ 80,000 15,000 ======== =======
(11) SUBORDINATED DEBENTURES On September 30, 2005, First Banks redeemed the First Preferred Capital Trust II (First Preferred II) 10.24% cumulative trust preferred securities at the liquidation value of $25 per preferred security, together with distributions accumulated and unpaid to the redemption date. The trust preferred securities of First Preferred II were traded on the Nasdaq National Market System under the ticker symbol "FBNKN." In conjunction with this transaction, First Banks paid in full its outstanding $59.3 million of 10.24% subordinated debentures that were issued by First Banks to First Preferred II in October 2000. The funds necessary for the redemption of the subordinated debentures were provided from a portion of the proceeds of First Banks' Term Loan, as discussed in Note 10 to the Consolidated Financial Statements. (12) CONTINGENT LIABILITIES In October 2000, First Banks entered into two continuing guaranty contracts. For value received, and for the purpose of inducing a pension fund and its trustees and a welfare fund and its trustees (the Funds) to conduct business with MVP, First Bank's institutional investment management subsidiary, First Banks irrevocably and unconditionally guaranteed payment of and promised to pay to each of the Funds any amounts up to the sum of $5.0 million to the extent MVP is liable to the Funds for a breach of the Investment Management Agreements (including the Investment Policy Statement and Investment Guidelines), by and between MVP and the Funds and/or any violation of the Employee Retirement Income Security Act by MVP resulting in liability to the Funds. The guaranties are continuing guaranties of all obligations that may arise for transactions occurring prior to termination of the Investment Management Agreements and are coexistent with the term of the Investment Management Agreements. The Investment Management Agreements have no specified term but may be terminated at any time upon written notice by the Trustees or, at First Banks' option, upon thirty days written notice to the Trustees. In the event of termination of the Investment Management Agreements, such termination shall have no effect on the liability of First Banks with respect to obligations incurred before such termination. The obligations of First Banks are joint and several with those of MVP. First Banks does not have any recourse provisions that would enable it to recover from third parties any amounts paid under the contracts nor does First Banks hold any assets as collateral that, upon occurrence of a required payment under the contract, could be liquidated to recover all or a portion of the amount(s) paid. At September 30, 2005 and December 31, 2004, First Banks had not recorded a liability for the obligations associated with these guaranty contracts as the likelihood that First Banks will be required to make payments under the contracts is remote. On June 30, 2004, First Bank completed the sale of a significant portion of the leases in its commercial leasing portfolio. In conjunction with the transaction, First Bank recorded a liability of $2.0 million for recourse obligations related to the completion of the sale. For value received, First Bank, as seller, indemnified the buyer of certain leases from any liability or loss resulting from defaults subsequent to the sale. First Bank's indemnification for the recourse obligations is limited to a specified percentage, ranging from 15% to 25%, of the aggregate lease purchase price of specific pools of leases sold. As of September 30, 2005 and December 31, 2004, this liability was $980,000 and $1.6 million, respectively, reflecting a change in the estimated probable loss based upon the payments received from the borrowers of the specific pools of leases sold and the performance of the portfolio. On August 31, 2004, SBLS LLC acquired substantially all of the assets and assumed certain liabilities of SBLS. The Amended and Restated Asset Purchase Agreement (Asset Purchase Agreement) governing this transaction provides for certain payments to the seller contingent on future valuations of specifically identified assets, including servicing assets and retained interests in securitizations. SBLS LLC was not required to make any payments to the seller as of September 30, 2005, the first measurement date under the terms of the Asset Purchase Agreement. As of September 30, 2005 and December 31, 2004, SBLS LLC had not recorded a liability for the obligations associated with these contingent payments, as the likelihood that SBLS LLC will be required to make future payments under the Asset Purchase Agreement is not ascertainable at the present time. (13) SUBSEQUENT EVENTS On October 31, 2005, First Banks completed its acquisition of NSB, Grayslake, Illinois, for $10.3 million in cash. The acquisition served to expand First Banks' banking franchise in Chicago, Illinois. The transaction was funded through internally generated funds. At the time of the acquisition, NSB had assets of $50.4 million, loans, net of unearned discount, of $41.4 million, deposits of $45.2 million and stockholders' equity of $5.0 million. The assets acquired and liabilities assumed were recorded at their estimated fair value on the acquisition date. The fair value adjustments represent current estimates and are subject to further adjustments as the valuation data is finalized. Preliminary goodwill, which is not deductible for tax purposes, was approximately $4.8 million, and the core deposit intangibles, which are not deductible for tax purposes and will be amortized over seven years utilizing the straight-line method, were approximately $909,000. NSB was merged with and into First Bank. On November 14, 2005, First Banks borrowed the remaining $20.0 million available on its Term Loan, bringing the total outstanding balance under the Term Loan to $100.0 million. The Term Loan is further described in Note 10 to the Consolidated Financial Statements. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements with respect to our financial condition, results of operations and business. Generally, forward looking statements may be identified through the use of words such as: "believe," "expect," "anticipate," "intend," "plan," "estimate," or words of similar meaning or future or conditional terms such as: "will," "would," "should," "could," "may," "likely," "probably," or "possibly." Examples of forward looking statements include, but are not limited to, estimates or projections with respect to our future financial condition, expected or anticipated revenues with respect to our results of operations and our business. These forward-looking statements are subject to certain risks and uncertainties, not all of which can be predicted or anticipated. Factors that may cause our actual results to differ materially from those contemplated by the forward-looking statements herein include market conditions as well as conditions affecting the banking industry generally and factors having a specific impact on us, including but not limited to: fluctuations in interest rates and in the economy, including the threat of future terrorist activities, existing and potential wars and/or military actions related thereto, and domestic responses to terrorism or threats of terrorism; the impact of laws and regulations applicable to us and changes therein; the impact of accounting pronouncements applicable to us and changes therein; competitive conditions in the markets in which we conduct our operations, including competition from banking and non-banking companies with substantially greater resources than us, some of which may offer and develop products and services not offered by us; our ability to control the composition of our loan portfolio without adversely affecting interest income; the credit risk associated with consumers who may not repay loans; the geographic dispersion of our offices; the impact our hedging activities may have on our operating results; the highly regulated environment in which we operate; and our ability to respond to changes in technology. With regard to our efforts to grow through acquisitions, factors that could affect the accuracy or completeness of forward-looking statements contained herein include the competition of larger acquirers with greater resources; fluctuations in the prices at which acquisition targets may be available for sale; the impact of making acquisitions without using our common stock; and possible asset quality issues, unknown liabilities or integration issues with the businesses that we have acquired. We do not have a duty to and will not update these forward-looking statements. Readers of this Quarterly Report on Form 10-Q should therefore consider these risks and uncertainties in evaluating forward looking statements and should not place undo reliance on these statements. General We are a registered bank holding company incorporated in Missouri in 1978 and headquartered in St. Louis, Missouri. We operate through our wholly owned subsidiary bank holding company, The San Francisco Company, or SFC, headquartered in San Francisco, California, and its wholly owned subsidiary bank, First Bank, headquartered in St. Louis, Missouri. First Bank operates through its branch banking offices and subsidiaries, FB Commercial Finance, Inc., Missouri Valley Partners, Inc. and Small Business Loan Source LLC, or SBLS LLC, which, except for SBLS LLC, are wholly owned subsidiaries. First Bank currently operates 177 branch banking offices in California, Illinois, Missouri and Texas. At September 30, 2005, we had total assets of $9.01 billion, loans, net of unearned discount, of $6.63 billion, total deposits of $7.38 billion and total stockholders' equity of $665.1 million. Through First Bank, we offer a broad range of commercial and personal deposit products, including demand, savings, money market and time deposit accounts. In addition, we market combined basic services for various customer groups, including packaged accounts for more affluent customers, and sweep accounts, lock-box deposits and cash management products for commercial customers. We also offer both consumer and commercial loans. Consumer lending includes residential real estate, home equity and installment lending. Commercial lending includes commercial, financial and agricultural loans, real estate construction and development loans, commercial real estate loans, asset-based loans and trade financing. Other financial services include mortgage banking, debit cards, brokerage services, credit-related insurance, internet banking, automated teller machines, telephone banking, safe deposit boxes and trust, private banking and institutional money management services. Primary responsibility for managing our banking unit rests with the officers and directors of each unit, but we centralize overall corporate policies, procedures and administrative functions and provide centralized operational support functions for our subsidiaries. This practice allows us to achieve various operating efficiencies while allowing our banking units to focus on customer service. Financial Condition Total assets were $9.01 billion and $8.73 billion at September 30, 2005 and December 31, 2004, respectively, reflecting an increase of $275.7 million for the nine months ended September 30, 2005. The increase in total assets is attributable to our acquisitions of FBA Bancorp, Inc., or FBA, on April 29, 2005, which provided total assets of $73.3 million, and International Bank of California, or IBOC, on September 30, 2005, which provided total assets of $151.6 million, increased goodwill associated with these acquisitions, in addition to internal growth within our loan portfolio and increases in cash and cash equivalents. These increases in total assets were partially offset by reductions in investment securities and other assets. Total loans, net of unearned discount, increased $489.8 million to $6.63 billion at September 30, 2005, from $6.14 billion at December 31, 2004, reflecting continued internal loan growth, and the acquisitions of FBA and IBOC, which provided loans, net of unearned discount, of $167.8 million, in aggregate, partially offset by loan sales and/or payoffs or reductions of balances associated with certain acquired loans, as further discussed under "--Loans and Allowance for Loan Losses." Total deposits increased $228.5 million to $7.38 billion at September 30, 2005, from $7.15 billion at December 31, 2004. The deposit growth was primarily attributable to the acquisitions of FBA and IBOC, which provided deposits of $187.8 million, in aggregate. The increase in deposits was partially offset by an anticipated level of attrition associated with the deposits acquired from CIB Bank, as further discussed below. Available cash and cash equivalents increased $20.0 million to $287.1 million at September 30, 2005, from $267.1 million at December 31, 2004. Investment securities decreased $227.3 million to $1.59 billion at September 30, 2005, from $1.81 billion at December 31, 2004, primarily reflecting maturities of $596.5 million and purchases of $321.3 million, including $100.0 million of securities purchases and subsequent maturities associated with the investment of funds provided by a temporary deposit, as further discussed below, and a $60.0 million purchase and subsequent maturity within the third quarter of 2005 associated with the temporary investment of funds provided from our $80.0 million term loan borrowed on August 11, 2005. The increase in loans was primarily funded by available cash and cash equivalents and maturities of investment securities. Goodwill increased $9.3 million to $166.2 million at September 30, 2005, from $156.8 million at December 31, 2004, and reflects the reallocation of the purchase price associated with our acquisition of CIB Bank, offset by goodwill associated with our acquisitions of FBA and IBOC, as further discussed in Note 2 to our Consolidated Financial Statements. Other assets decreased $28.1 million to $101.5 million at September 30, 2005, from $129.6 million at December 31, 2004. This decrease is primarily attributable to a $9.9 million decline in our derivative financial instruments from $4.7 million at December 31, 2004, due to a decline in the fair value of certain derivative financial instruments, the maturity of $200.0 million notional amount of interest rate swap agreements on March 21, 2005 and the termination of $150.0 million and $101.2 million notional amount of interest rate swap agreements on February 25, 2005 and May 27, 2005, respectively, as further discussed under "--Interest Rate Risk Management." Additionally, the decline in other assets reflects decreases in servicing assets and core deposit intangibles, reductions in other real estate owned, and the receipt of certain receivables during the first quarter of 2005, including a receivable for current income taxes of $8.3 million and a receivable for fiduciary related fees of $3.4 million. Total deposits increased $228.5 million to $7.38 billion at September 30, 2005, from $7.15 billion at December 31, 2004. The increase is primarily attributable to our acquisitions of FBA and IBOC, which provided total deposits of $55.7 million and $132.1 million, respectively. A single source temporary commercial money market deposit received in the second quarter of 2005, with a balance of $216.4 million at June 30, 2005, has declined to $14.1 million at September 30, 2005. The overall increase in deposits was largely offset by a decrease in deposits attributable to an anticipated level of attrition associated with the deposits acquired from CIB Bank, particularly savings and time deposits, including brokered and internet deposits. The acquisition of CIB Bank, which was completed on November 30, 2004, provided total deposits of $1.10 billion. Our continued deposit marketing focus and efforts to further develop multiple account relationships with our customers, coupled with slightly higher deposit rates on certain products, have contributed to deposit growth despite continued aggressive competition within our market areas and the anticipated level of attrition associated with our recent acquisitions. The deposit mix reflects our continued efforts to restructure the composition of our deposit base as the majority of our deposit development programs are directed toward increased transaction accounts, such as demand and savings accounts, rather than higher cost time deposits. Other borrowings decreased $26.1 million to $568.7 million at September 30, 2005, from $594.8 million at December 31, 2004. The decrease is attributable to a $29.8 million decrease in daily securities sold under agreements to repurchase resulting from changes in customer activity and demand, partially offset by a $3.7 million increase in Federal Home Loan Bank advances that were assumed with our FBA acquisition. Our notes payable increased $65.0 million to $80.0 million at September 30, 2005 as a result of the $80.0 million borrowed on our $100.0 million term loan facility on August 11, 2005, as further described in Note 10 to our Consolidated Financial Statements. This increase was partially offset by a $15.0 million reduction in borrowings on our revolving credit facility, which was repaid with funds generated from dividends from First Bank. Our subordinated debentures decreased to $215.4 million at September 30, 2005 from $273.3 million at December 31, 2004, as a result of the repayment, on September 30, 2005, of our $59.3 million of 10.24% subordinated debentures that were issued to First Preferred Capital Trust II, or First Preferred II, as further described in Note 11 to our Consolidated Financial Statements. The decrease in our subordinated debentures was partially offset by changes in the fair value of our interest rate swap agreements that are designated as fair value hedges and utilized to hedge certain issues of our subordinated debentures and the continued amortization of debt issuance costs. Minority interest in SBLS LLC was $6.3 million at September 30, 2005. On June 30, 2005, First Capital America, Inc., or FCA, exercised an option to purchase Membership Interests of SBLS LLC for $7.4 million in cash. As a result of this transaction, SBLS LLC became 51% owned by First Bank and 49% owned by FCA, as further described in Note 1, Note 2 and Note 6 to our Consolidated Financial Statements. Stockholders' equity was $665.1 million and $600.9 million at September 30, 2005 and December 31, 2004, respectively, reflecting an increase of $64.2 million. The increase is attributable to net income of $76.5 million, partially offset by an $11.7 million decrease in accumulated other comprehensive income, comprised of $3.9 million associated with changes in the fair value of our derivative financial instruments and $7.8 million associated with changes in unrealized gains and losses on our available-for-sale investment securities. The decrease in accumulated other comprehensive income is reflective of increases in prevailing interest rates, a decline in the fair value of our derivative financial instruments, and the maturity of $200.0 million notional amount of our interest rate swap agreements designated as cash flow hedges during the first quarter of 2005, as further discussed under "--Interest Rate Risk Management." Results of Operations Net Income Net income was $27.5 million and $19.7 million for the three months ended September 30, 2005 and 2004, respectively, reflecting an increase of 39.3%. Net income was $76.5 million and $64.0 million for the nine months ended September 30, 2005 and 2004, respectively, reflecting an increase of 19.5%. Our return on average assets was 1.23% and 1.17% for the three and nine months ended September 30, 2005, respectively, compared to 1.04% and 1.16% for the comparable periods in 2004. Our return on average stockholders' equity was 16.61% and 16.26% for the three and nine months ended September 30, 2005, respectively, compared to 13.89% and 15.11% for the comparable periods in 2004. Net income for the three and nine months ended September 30, 2005 reflects increased net interest income and noninterest income, and a negative provision for loan losses, partially offset by increased noninterest expense and an increased provision for income taxes. The increase in earnings in 2005 reflects our continuing efforts to strengthen earnings and simultaneously improve asset quality. Net interest-earning assets provided by our 2004 and 2005 acquisitions, higher-yielding investment securities, and internal loan growth coupled with higher interest rates on loans have contributed to increased interest income. However, net interest income was adversely affected by a decline in earnings on our interest rate swap agreements that were entered into in conjunction with our interest rate risk management program to mitigate the effects of decreasing interest rates. This decline in earnings on our swap agreements was primarily the result of increasing prevailing interest rates and the maturity and termination of certain interest rate swap agreements, as further discussed under "--Interest Rate Risk Management." In addition, interest expense increased due to higher interest rates on deposits; a redistribution of deposit balances toward higher-yielding products primarily related to the mix of the CIB Bank deposit base acquired, which included higher cost time deposits, including brokered and internet deposits; increased levels of other borrowings coupled with increased rates on such borrowings, including our term loan; and the issuance of additional subordinated debentures late in 2004 to partially fund our acquisition of CIB Bank. Despite the increasing interest rate environment, overall conditions within our markets and the impact of the decline in earnings on our interest rate swap agreements continue to exert pressure on our net interest income and net interest margin. Our overall asset quality levels reflect continued improvement during 2005, resulting in a $19.3 million, or 21.4% reduction in nonperforming assets, and a $25.9 million, or 90.3% reduction in loans past due 90 days or more and still accruing interest since December 31, 2004. A significant portion of our nonperforming assets is comprised of nonperforming loans associated with our acquisition of CIB Bank, which reflect $32.8 million, or 48.4%, of our total nonperforming loans at September 30, 2005. The reduction in both nonperforming loans and loans past due 90 days or more and still accruing interest reflects our ongoing emphasis on improving asset quality, the sale of certain acquired nonperforming loans, a reduction in net loan charge-offs, as well as loan payoffs and/or external refinancing of various credits, as further discussed under "--Loans and Allowance for Loan Losses" and "--Provision for Loan Losses." Several of these factors contributed to a substantial reduction in our provision for loan losses. We recorded a negative provision for loan losses of $8.0 million for the nine months ended September 30, 2005, compared to provisions for loan losses of $7.5 million and $23.3 million for the three and nine months ended September 30, 2004, respectively. We did not record a provision for loan losses for the three months ended September 30, 2005. We continue to closely monitor our loan portfolio and consider these factors in our overall assessment of the adequacy of the allowance for loan losses. Noninterest income was $24.5 million and $71.4 million for the three and nine months ended September 30, 2005, respectively, in comparison to $22.0 million and $62.6 million for the comparable periods in 2004. The increase for the first nine months of 2005 is primarily attributable to noninterest income resulting from our 2004 and 2005 acquisitions, increased gains on loans sold and held for sale, increased investment management fees associated with our institutional money management subsidiary, increased service charges on deposit accounts and customer service fees related to higher deposit balances, increased gains, net of losses, on the sale of certain assets, primarily related to our commercial leasing portfolio, the recognition of recoveries of certain loans that had been charged-off by the respective financial institutions prior to the date of our acquisition, and recoveries of loan collection expenses. The overall increase in noninterest income for 2005 was partially offset by a decline in loan servicing fees, primarily as a result of the recognition of a $2.4 million impairment charge on our small business lending servicing assets following substantial damage to several shrimping vessels within our servicing portfolio caused by the effects of Hurricane Katrina. In addition, rental income declined as a result of our reduced commercial leasing activities, and losses on the disposal of fixed assets increased, primarily associated with the demolition of a branch drive-thru facility in the first quarter of 2005. Also, as previously discussed, we recorded $1.0 million in gains, net of expenses, resulting from the sale of two Midwest branch banking offices in 2004. Noninterest expense was $67.4 million and $201.0 million for the three and nine months ended September 30, 2005, respectively, in comparison to $58.4 million and $166.4 million for the comparable periods in 2004. Our efficiency ratio, which is defined as the ratio of noninterest expense to the sum of net interest income and noninterest income, was 62.92% and 64.83% for the three and nine months ended September 30, 2005, respectively, compared to 59.83% and 57.67% for the comparable periods in 2004. The overall increase in our noninterest expenses and our efficiency ratio is attributable to expenses resulting from our 2004 and 2005 acquisitions, increases in salaries and employee benefits expense, information technology expense, and expenditures and losses, net of gains, on other real estate, as further discussed below. The increase in our efficiency ratio is also attributable to a decrease in our net interest margin from year-to-year in addition to larger increases in noninterest expense as compared to the increases in net interest income and noninterest income, which did not increase at the same rate as noninterest expenses. Salary and employee benefit expenses increased due to the impact of our acquisitions in 2004 and 2005, which added a total of 26 branch offices, the addition of five de novo branch offices in 2004 and 2005, and generally higher costs of employing and retaining qualified personnel, including enhanced incentive compensation and employee benefit plans. We continue to closely monitor noninterest expense levels following our recent acquisitions and have implemented certain expense reduction measures in an effort to improve our efficiency ratio in future periods. Net Interest Income Net interest income (expressed on a tax-equivalent basis) increased to $83.0 million and $239.5 million for the three and nine months ended September 30, 2005, respectively, from $75.9 million and $226.8 million for the comparable periods in 2004, reflecting continued growth. Our net interest rate margin was 4.00% and 3.97% for the three and nine months ended September 30, 2005, respectively, in comparison to 4.37% and 4.50% for the three and nine months ended September 30, 2004, respectively. Net interest income is the difference between interest earned on our interest-earning assets, such as loans and securities, and interest paid on our interest-bearing liabilities, such as deposits and borrowings. Net interest income is affected by the level and composition of assets, liabilities and stockholders' equity, as well as the general level of interest rates and changes in interest rates. Interest income on a tax-equivalent basis includes the additional amount of interest income that would have been earned if our investment in certain tax-exempt interest earning assets had been made in assets subject to federal, state and local income taxes yielding the same after-tax income. Net interest margin is determined by dividing net interest income on a tax-equivalent basis by average interest-earning assets. The interest rate spread is the difference between the average equivalent yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. We primarily credit the increase in net interest income to interest-earning assets provided by our 2004 and 2005 acquisitions, higher-yielding investment securities, internal loan growth coupled with higher interest rates on loans, partially offset by increased interest expense associated with higher interest rates on deposits and a redistribution of deposit balances toward higher-yielding products, the mix of the CIB Bank deposit base acquired, as further discussed below, and increased levels of other borrowings, including our term loan, coupled with increased interest rates on such borrowings, and the issuance of additional subordinated debentures in late 2004 to partially fund our acquisition of CIB Bank. Net interest income was adversely impacted by a decline in earnings on our interest rate swap agreements that were entered into in conjunction with our interest rate risk management program to mitigate the effects of decreasing interest rates. As further discussed under "--Interest Rate Risk Management," these derivative financial instruments reduced our net interest income by $626,000 for the third quarter of 2005, in comparison to increasing our net interest income by $13.0 million for the comparable period in 2004. For the nine months ended September 30, 2005 and 2004, our derivative financial instruments increased our net interest income by $3.3 million and $44.7 million, respectively. The decreased earnings on our interest rate swap agreements for the three and nine months ended September 30, 2005 contributed to a reduction in our net interest margin of approximately 66 basis points and 69 basis points, respectively, and reflect the impact of higher interest rates and maturities of $750.0 million of interest rate swap agreements designated as cash flow hedges and $50.0 million of interest rate swap agreements designated as fair value hedges during 2004, and the maturity of $200.0 million of interest rate swap agreements designated as cash flow hedges in March 2005, as well as the termination of $150.0 million and $101.2 million of interest rate swap agreements on February 25, 2005 and May 27, 2005, respectively. Although the Company has implemented other methods to mitigate the reduction in net interest income resulting from the decreased earnings on our interest rate swap agreements, including the funding of investment security purchases through the issuance of term repurchase agreements, the reduction of our interest rate swap agreements has resulted in a substantial reduction of net interest income and further compression of our net interest margin, which has been partially offset by the impact of the rising rate environment. Average interest-earning assets increased to $8.22 billion and $8.06 billion for the three and nine months ended September 30, 2005, respectively, from $6.90 billion and $6.74 billion for comparable periods in 2004. The increase is primarily attributable to our three acquisitions completed in 2004, which provided assets of $1.38 billion in aggregate, and our acquisition of FBA on April 29, 2005, which provided assets of $73.3 million. The increase in average interest-earning assets is also attributable to internal growth within our loan portfolio. In addition, we purchased $250.0 million of callable U.S. Government agency securities relating to the issuance of $250.0 million of term repurchase agreements that we entered into in conjunction with our interest rate risk management program during the first and second quarters of 2004. Despite the rising interest rate environment, overall competitive conditions within our market areas and the impact of the maturity and termination of certain interest rate swap agreements, as discussed above and under "--Interest Rate Risk Management," continue to exert pressure on our net interest income and net interest margin. Average investment securities increased to $1.68 billion and $1.70 billion for the three and nine months ended September 30, 2005, respectively, from $1.25 billion and $1.22 billion for the comparable periods in 2004. The yield on our investment portfolio was 4.09% and 4.15% for the three and nine months ended September 30, 2005, respectively, compared to 4.14% and 4.12% for the comparable periods in 2004. The overall increase in the average balance of investment securities primarily relates to our 2004 and 2005 acquisitions, which provided investment securities of $438.0 million and $20.1 million, respectively. Funds available from maturities of investment securities were used to fund a decrease in deposits associated with an anticipated level of attrition during the first quarter of 2005, primarily time deposits acquired with CIB Bank. The remaining funds available from maturities of investment securities were used to fund loan growth and the reinvestment in additional higher-yielding investment securities. Additionally, a portion of excess short-term investments, which include federal funds sold and interest-bearing deposits, was also utilized to fund deposit attrition, loan growth, and to purchase higher-yielding available-for-sale investment securities, resulting in a decline in average short-term investments to $96.3 million and $75.8 million for the three and nine months ended September 30, 2005, respectively, from $136.0 million and $105.7 million for the comparable periods in 2004. During 2005, our investment securities purchases and maturities included the purchase of $160.0 million of short-term Federal Home Loan Bank discount notes associated with the investment of funds provided by a single source temporary deposit, as previously discussed. During 2004, our investment securities purchases included the purchase of $250.0 million of callable U.S. Government agency securities, representing the underlying securities associated with $250.0 million, in aggregate, of three-year term repurchase agreements under master repurchase agreements that we consummated in the first and second quarters of 2004, as further described in Note 9 to our Consolidated Financial Statements. Average loans, net of unearned discount, were $6.45 billion and $6.29 billion for the three and nine months ended September 30, 2005, respectively, compared to $5.52 billion and $5.41 billion for the comparable periods in 2004. The yield on our loan portfolio was 6.76% and 6.46% for the three and nine months ended September 30, 2005, respectively, in comparison to 6.22% and 6.28% for the comparable periods in 2004. Although our loan portfolio yields increased with rising interest rates during 2005, total interest income on our loan portfolio was adversely impacted by decreased earnings on our interest rate swap agreements designated as cash flow hedges. Higher interest rates and the maturities of interest rate swap agreements designated as cash flow hedges of $750.0 million in 2004 and $200.0 million in March 2005 resulted in decreased earnings on our swap agreements thereby contributing to a reduction in yields on our loan portfolio, and a compression of our net interest income and net interest margin of approximately $10.0 million or 48 basis points, and $32.6 million or 54 basis points, for the three and nine months ended September 30, 2005, respectively, as compared to the comparable periods in 2004. Interest income on our loan portfolio includes the recognition of $1.7 million of interest income resulting from payoffs of certain loans on nonaccrual status during 2005. We attribute the increase in average loans of $878.9 million for the nine months ended September 30, 2005, over the comparable period in 2004, primarily to our acquisitions completed during 2004 and 2005, which provided total loans, in aggregate, of $780.9 million and $167.8 million, respectively. The increase is also the result of internal loan growth, partially offset by reductions in our nonperforming loan portfolio due to the sale of certain nonperforming loans, loan payoffs and/or external refinancing of various credits. Average commercial, financial and agricultural loans increased $124.1 million for the nine months ended September 30, 2005, over the comparable period in 2004, as a result of our 2004 acquisitions. This increase was partially offset by a $33.2 million decrease in average lease financing volumes resulting from our business strategy initiated in late 2002 to reduce our commercial leasing activities and subsequently sell a significant portion of the remaining leases in our commercial leasing portfolio in June 2004. Average real estate construction and development loans increased approximately $204.8 million for the nine months ended September 30, 2005, over the comparable period in 2004, primarily as a result of our recent acquisitions and seasonal fluctuations on existing and available credit lines as well as new loan production. Average real estate mortgage loans increased approximately $540.2 million for the nine months ended September 30, 2005, over the comparable period in 2004. This increase is attributable to a $395.9 million increase in commercial real estate loans primarily resulting from our recent acquisitions, as well as a $144.3 million increase in residential real estate mortgage loans due to our recent acquisitions and our business strategy decision to retain a portion of our residential mortgage loan production that would have been previously sold in the secondary market. Average loans held for sale increased approximately $34.1 million for the nine months ended September 30, 2005, over the comparable period in 2004, resulting from increased volumes of loan originations coupled with the timing of loan sales in the secondary mortgage market. Average deposits increased to $7.23 billion and $7.12 billion for the three and nine months ended September 30, 2005, from $6.12 billion and $6.04 billion for the comparable periods in 2004. For the three and nine months ended September 30, 2005, the aggregate weighted average rate paid on our deposit portfolio increased 80 basis points and 63 basis points to 2.22% and 2.02%, respectively, from 1.42% and 1.39% for the comparable periods in 2004, and is primarily attributable to the current rising interest rate environment and the mix of the CIB Bank deposit base acquired in November 2004, which included higher cost time deposits, including brokered and internet deposits. In addition, the decreased earnings associated with certain of our interest rate swap agreements designated as fair value hedges, as well as the termination of $150.0 million of fair value hedges on February 25, 2005, resulted in a decrease in our net interest income and net interest margin for the three and nine months ended September 30, 2005, of approximately $2.4 million or 12 basis points, and $6.2 million or 11 basis points, respectively, compared to the same periods in 2004. The increase in average deposits is primarily reflective of our acquisitions completed during 2004 and 2005, which provided deposits, in aggregate, of $1.21 billion and $192.9 million, respectively. Although overall average deposit levels have increased as a result of our 2004 and 2005 acquisitions, the overall increase in average deposits was partially offset by a significant decrease in deposits due to an anticipated level of attrition associated with the deposits acquired from CIB Bank, particularly savings and time deposits, including brokered and internet deposits. Excluding the impact of our acquisitions, the change in our average deposit mix reflects our continued efforts to restructure the composition of our deposit base as the majority of our deposit development programs are directed toward increased transactional accounts, such as demand and savings accounts, rather than time deposits, and emphasize attracting more than one account relationship with customers. Average demand and savings deposits were $4.34 billion and $4.28 billion for the three and nine months ended September 30, 2005, respectively, and $4.14 billion and $4.09 billion for the comparable periods in 2004. Average total time deposits increased to $2.89 billion and $2.84 billion for the three and nine months ended September 30, 2005, respectively, compared to $1.98 billion and $1.95 billion for the comparable periods in 2004. The $216.4 million single source temporary commercial money market deposit that originated in the second quarter of 2005 had decreased to $14.1 million at September 30, 2005, and accounted for an increase in average savings deposits of approximately $109.6 million and $54.8 million for the three and nine months ended September 30, 2005, respectively, over the comparable periods in 2004. Average other borrowings increased to $570.9 million and $572.7 million for the three and nine months ended September 30, 2005, respectively, compared to $541.1 million and $456.6 million for the comparable periods in 2004. The aggregate weighted average rate paid on our other borrowings was 3.44% and 2.91% for the three and nine months ended September 30, 2005, respectively, compared to 1.46% and 0.99% for the comparable periods in 2004. The increased rate paid on our other borrowings reflects the increased short-term interest rate environment that began in the second quarter of 2004. The increase in average other borrowings is primarily attributable to $250.0 million of term repurchase agreements that we consummated during 2004, as further described in Note 9 to our Consolidated Financial Statements. Our notes payable averaged $44.3 million and $18.8 million for the three and nine months ended September 30, 2005, respectively, and $3.1 million for the nine months ended September 30, 2004. The aggregate weighted average rate paid on our notes payable was 7.71% and 7.85% for the three and nine months ended September 30, 2005, respectively, and 16.97% for the nine months ended September 30, 2004. The weighted average rate paid reflects unused credit commitment and letter of credit facility fees on our secured credit agreement, as well as other fees paid in conjunction with the annual renewal of our secured credit agreement. Amounts outstanding under our revolving line of credit with a group of unaffiliated financial institutions bear interest at a floating rate equal to the lead bank's prime rate or, at our option, at the London Interbank Offering Rate, or Eurodollar Rate, plus a margin determined by the outstanding loan balances and our profitability for the preceding four calendar quarters. Amounts outstanding under our term loan with a group of unaffiliated financial institutions bear interest at a floating rate equal to the Eurodollar Rate plus a margin determined by the outstanding loan balances and our profitability for the preceding four calendar quarters. Thus, our secured credit agreement represents a relatively high-cost funding source as increased advances have the effect of increasing the weighted average rate of non-deposit liabilities. On August 11, 2005, we entered into an Amended and Restated Secured Credit Agreement and restructured our overall financing arrangement, as further described in Note 10 to our Consolidated Financial Statements. In conjunction with this transaction, we borrowed $80.0 million on the term loan and borrowed the remaining $20.0 million on November 14, 2005. The proceeds of the term loan were used to fund our acquisition of IBOC and to partially fund the redemption of our 10.24% subordinated debentures issued to First Preferred II, as further discussed below. Average subordinated debentures were $274.5 million and $274.0 million for the three and nine months ended September 30, 2005, compared to $211.8 million and $210.6 million for the comparable periods in 2004. The aggregate weighted average rate paid on our subordinated debentures was 8.65% and 7.85% for the three and nine months ended September 30, 2005, respectively, and 7.01% and 6.85% for the comparable periods in 2004. Interest expense on our subordinated debentures was $6.0 million and $16.1 million for the three and nine months ended September 30, 2005, respectively, compared to $3.7 million and $10.8 million for the comparable periods in 2004. As previously discussed, the increase for the three and nine months ended September 30, 2005 primarily reflects the issuance of $61.9 million of additional subordinated debentures in late 2004 to partially fund our acquisition of CIB Bank, partially offset by the earnings impact of our interest rate swap agreements. The issuance of the additional subordinated debentures as well as the termination of $101.2 million of fair value hedges on May 27, 2005, as further discussed under "--Interest Rate Risk Management," resulted in a decrease in our net interest income and net interest margin for the three and nine months ended September 30, 2005, of approximately $2.1 million or ten basis points, and $5.0 million or eight basis points, respectively, compared to the comparable periods in 2004. However, as further described in Note 11 to our Consolidated Financial Statements, on September 30, 2005, we paid in full our outstanding $59.3 million of 10.24% subordinated debentures that we previously issued in October 2000. The reduction of these outstanding subordinated debentures will assist us in improving our net interest income and net interest margin in the future, especially in consideration of the high interest rate associated with them.
The following table sets forth, on a tax-equivalent basis, certain information relating to our average balance sheets, and reflects the average yield earned on interest-earning assets, the average cost of interest-bearing liabilities and the resulting net interest income for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, -------------------------------------------------- ----------------------------------------------- 2005 2004 2005 2004 ------------------------- ----------------------- ---------------------- ----------------------- Interest Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ---- ------- ------- ---- (dollars expressed in thousands) Assets ------ Interest-earning assets: Loans (1)(2)(3)(4).......... $6,450,922 109,997 6.76% $5,518,978 86,315 6.22% $6,288,486 303,801 6.46% $5,409,545 254,504 6.28% Investment securities (4)... 1,676,052 17,296 4.09 1,247,820 12,972 4.14 1,698,032 52,710 4.15 1,221,985 37,697 4.12 Short-term investments...... 96,257 841 3.47 135,987 476 1.39 75,830 1,701 3.00 105,748 899 1.14 ---------- ------- ---------- ------ ---------- ------- ---------- ------- Total interest-earning assets............... 8,223,231 128,134 6.18 6,902,785 99,763 5.75 8,062,348 358,212 5.94 6,737,278 293,100 5.81 ------- ------ ------- ------- Nonearning assets.............. 651,429 618,644 653,118 634,085 ---------- ---------- ---------- ---------- Total assets........... $8,874,660 $7,521,429 $8,715,466 $7,371,363 ========== ========== ========== ========== Liabilities and Stockholders' Equity ------------------------------------ Interest-bearing liabilities: Interest-bearing deposits: Interest-bearing demand deposits................ $ 897,502 979 0.43% $ 842,855 801 0.38% $ 888,585 2,799 0.42% $ 855,434 2,592 0.40% Savings deposits.......... 2,171,596 8,345 1.52 2,180,594 5,116 0.93 2,150,792 20,420 1.27 2,162,174 14,486 0.89 Time deposits of $100 or more................. 907,311 7,206 3.15 501,660 3,358 2.66 854,041 18,806 2.94 466,543 9,353 2.68 Other time deposits (3)... 1,979,844 16,832 3.37 1,480,167 8,636 2.32 1,986,212 46,967 3.16 1,486,212 25,296 2.27 ---------- ------- ---------- ------ ---------- ------- --------- ------- Total interest-bearing deposits............. 5,956,253 33,362 2.22 5,005,276 17,911 1.42 5,879,630 88,992 2.02 4,970,363 51,727 1.39 Other borrowings............ 570,919 4,946 3.44 541,073 1,982 1.46 572,686 12,480 2.91 456,621 3,383 0.99 Notes payable (5)........... 44,348 862 7.71 -- 229 -- 18,791 1,103 7.85 3,133 398 16.97 Subordinated debentures (3). 274,466 5,985 8.65 211,773 3,731 7.01 274,026 16,096 7.85 210,570 10,798 6.85 ---------- ------- ---------- ------ ---------- ------- ---------- ------- Total interest-bearing liabilities.......... 6,845,986 45,155 2.62 5,758,122 23,853 1.65 6,745,133 118,671 2.35 5,640,687 66,306 1.57 ------- ------ ------- ------- Noninterest-bearing liabilities: Demand deposits............. 1,274,933 1,114,587 1,242,166 1,070,269 Other liabilities........... 96,719 83,109 99,094 94,299 ---------- ---------- ---------- ---------- Total liabilities...... 8,217,638 6,955,818 8,086,393 6,805,255 Stockholders' equity........... 657,022 565,611 629,073 566,108 ---------- ---------- ---------- ---------- Total liabilities and stockholders' equity. $8,874,660 $7,521,429 $8,715,466 $7,371,363 ========== ========== ========== ========== Net interest income............ 82,979 75,910 239,541 226,794 ======= ====== ======= ======= Interest rate spread........... 3.56 4.10 3.59 4.24 Net interest margin (6)........ 4.00% 4.37% 3.97% 4.50% ==== ==== ==== ===== - -------------------- (1) For purposes of these computations, nonaccrual loans are included in the average loan amounts. (2) Interest income on loans includes loan fees. (3) Interest income and interest expense include the effects of interest rate swap agreements. (4) Information is presented on a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent adjustments were approximately $333,000 and $995,000 for the three and nine months ended September 30, 2005, and $302,000 and $927,000 for the comparable periods in 2004, respectively. (5) Interest expense on the notes payable includes commitment, arrangement and renewal fees. Exclusive of these fees, the interest rates paid were 5.14% and 5.81% for the three and nine months ended September 30, 2005, and 10.06% for the nine months ended September 30, 2004. (6) Net interest margin is the ratio of net interest income (expressed on a tax-equivalent basis) to average interest-earning assets.
Provision for Loan Losses We did not record a provision for loan losses for the three months ended September 30, 2005. We recorded an $8.0 million negative provision for loan losses for the nine months ended September 30, 2005, in comparison to provisions for loan losses of $7.5 million and $23.3 million for the three and nine months ended September 30, 2004, respectively. The negative provision for loan losses recorded during 2005 is reflective of a 21% improvement in nonperforming loans from December 31, 2004 to September 30, 2005 resulting from loan payoffs and/or external refinancing of various credit relationships as well as a significant reduction in net loan charge-offs. Nonperforming loans decreased $18.0 million, or 21.0%, to $67.8 million at September 30, 2005 from $85.8 million at December 31, 2004. Loans past due 90 days or more and still accruing interest decreased $25.9 million, or 90.3%, to $2.8 million at September 30, 2005 from $28.7 million at December 31, 2004. The decrease in nonperforming loans and past due loans during the nine months ended September 30, 2005 reflects an improvement in asset quality resulting from the sale of approximately $14.3 million of certain acquired nonperforming loans, a significant reduction in net loan charge-offs, as well as loan payoffs and/or external refinancing of various credits, including $97.3 million in payoffs relating to 14 credit relationships, as further discussed under "--Loans and Allowance for Loan Losses." We recorded net loan charge-offs of $1.8 million and $4.7 million for the three and nine months ended September 30, 2005, respectively, compared to $7.9 million and $18.6 million for the comparable periods in 2004. Our allowance for loan losses was $139.5 million at September 30, 2005, compared to $140.2 million at June 30, 2005, $144.2 million at March 31, 2005 and $150.7 million at December 31, 2004. Our allowance for loan losses as a percentage of loans, net of unearned discount, was 2.10% at September 30, 2005, compared to 2.22% at June 30, 2005, 2.34% at March 31, 2005 and 2.46% at December 31, 2004. Our allowance for loan losses as a percentage of nonperforming loans was 205.64% at September 30, 2005, compared to 188.77% at June 30, 2005, 180.71% at March 31, 2005 and 175.65% at December 31, 2004. Management continues to closely monitor its operations to address the ongoing challenges posed by the significant level of nonperforming loans acquired with our CIB Bank acquisition, which represent 48.4% of our total nonperforming loans at September 30, 2005. While nonperforming loans added by our recent acquisitions have contributed to the overall level of nonperforming assets, such increases have been offset by improvements both in the remainder of our loan portfolio and in the acquired loan portfolios subsequent to their acquisition dates. Management considers these factors in its overall assessment of the adequacy of the allowance for loan losses. Tables summarizing nonperforming assets, past due loans and charge-off and recovery experience are presented under "--Loans and Allowance for Loan Losses." Noninterest Income Noninterest income was $24.5 million and $71.4 million for the three and nine months ended September 30, 2005, respectively, in comparison to $22.0 million and $62.6 million for the comparable periods in 2004. Noninterest income consists primarily of service charges on deposit accounts and customer service fees, mortgage-banking revenues, investment management income, bank owned life insurance investment income and other income. Service charges on deposit accounts and customer service fees were $10.2 million and $29.7 million for the three and nine months ended September 30, 2005, respectively, in comparison to $9.8 million and $28.6 million for the comparable periods in 2004. The increase in service charges and customer service fees is primarily attributable to increased demand deposit account balances associated with our acquisitions of Continental Community Bank and Trust Company, or CCB, CIB Bank and FBA, completed in July 2004, November 2004 and April 2005, respectively. The increase is also attributable to additional products and services available and utilized by our retail and commercial customer base, increased fee income from customer service charges for non-sufficient fund and returned check fees coupled with enhanced control of fee waivers, higher earnings allowances on commercial deposit accounts and increased income associated with automated teller machine services and debit cards, as well as pricing increases on certain service charges and customer service fees instituted to reflect current market conditions. The gain on loans sold and held for sale was $6.5 million and $17.9 million for the three and nine months ended September 30, 2005, respectively, in comparison to $4.7 million and $12.9 million for the comparable periods in 2004. The increase in 2005 is partially attributable to an increase of $2.3 million of gains on United States Small Business Administration, or SBA, loans sold associated with SBLS LLC. The increase is also attributable to an increase in gains on mortgage loans sold resulting from an increase in the volume of mortgage loan sales in the secondary market as a result of increased loan origination volumes. In general, new residential mortgage loan production of 15-year fixed rate, conforming conventional adjustable rate mortgages and other similar products are being retained in our portfolio, while other loans, primarily 20- and 30-year fixed rate loans, are typically being sold in the secondary loan markets. Gains, net of expenses, on the sale of two Midwest banking offices were $1.0 million for the nine months ended September 30, 2004, and reflect a $390,000 gain, net of expenses, on the sale of one of our Missouri branch banking offices in February 2004, and a $630,000 gain, net of expenses, on the sale of one of our Illinois banking offices in April 2004. There have not been any sales of branch banking offices during 2005. Investment management income was $2.1 million and $6.4 million for the three and nine months ended September 30, 2005, respectively, in comparison to $1.8 million and $5.1 million for the comparable periods in 2004, reflecting increased portfolio management fees generated by our institutional money management subsidiary attributable to new business development and overall growth in assets under management. Bank-owned life insurance investment income was $1.2 million and $3.7 million for the three and nine months ended September 30, 2005, respectively, in comparison to $1.3 million and $3.9 million for the comparable periods in 2004. The decrease in investment income reflects a reduced return on the performance of the underlying investments surrounding the insurance contracts which is primarily attributable to the portfolio mix of investments and overall market conditions. Other income was $4.6 million and $13.8 million for the three and nine months ended September 30, 2005, respectively, in comparison to $4.2 million and $11.0 million for the comparable periods in 2004. We attribute the primary components of the increase in 2005 to: >> an increase of $2.3 million recorded in the third quarter of 2005 attributable to recoveries of certain loan principal balances that had been charged-off by the various respective financial institutions prior to their acquisition by First Banks; >> a recovery of agent loan collection expenses of $500,000 and $239,000 in the first and third quarters of 2005, respectively, as permitted under a loan participation agreement prior to recovery of principal and interest, from funds collected from the liquidation of a portion of the collateral that secured the loan by the receiver; >> a net decrease in losses on the valuation or sale of certain repossessed assets, primarily related to our commercial leasing portfolio. Net gains for 2005 were $640,000 and included $464,000 of gains on two sales of repossessed leasing equipment. Net losses for 2004 were $307,000 and included a $750,000 write-down on repossessed aircraft leasing equipment, partially offset by gains of $510,000 on the sale of other repossessed aircraft leasing equipment; >> an increase of $608,000 reflecting reductions of a contingent liability established in conjunction with the sale of a portion of our commercial leasing portfolio in June 2004. The reductions of the contingent liability in the second and third quarters of 2005 of $478,000 and $130,000, respectively, were the result of further reductions in related lease balances for the specific pools of leases sold, as further discussed in Note 12 to our Consolidated Financial Statements; >> an increase of $571,000 in fees from fiduciary activities; and >> our acquisitions of CCB and CIB Bank completed during 2004 and FBA completed in April 2005; partially offset by >> a $215,000 net decrease in loan servicing fees. The net decrease is primarily attributable to: increased fees from loans serviced for others, primarily attributable to a $2.4 million increase in SBLS LLC loan servicing fees, offset by a $1.6 million increase in amortization of SBA servicing rights and the recognition of a $2.4 million impairment charge on the SBA servicing rights following substantial damage to several shrimping vessels within the servicing portfolio caused by the effects of Hurricane Katrina; a $329,000 decrease in mortgage loan servicing fees, including a lower level of interest shortfall on mortgage loans, offset by a $1.4 million decrease in amortization of mortgage servicing rights; and increased unused commitment fees of $405,000. Interest shortfall is the difference between the interest collected from a loan-servicing customer upon prepayment of the loan and a full month's interest that is required to be remitted to the security owner; >> a decline of $947,000 in rental income associated with our reduced commercial leasing activities; >> a decline of $550,000 in income associated with standby letters of credit; >> a decline of $148,000 in brokerage revenue primarily associated with overall market conditions and reduced customer demand; >> a net increase in losses, net of gains, on the disposition of certain assets, primarily attributable to a $319,000 net loss resulting from the demolition of a branch drive-thru facility in the first quarter of 2005; and >> an increase in net losses on our derivative instruments. Net losses on derivative instruments were $403,000 and $993,000 for the three and nine months ended September 30, 2005, respectively, compared to $401,000 and $856,000 for the comparable periods in 2004. Noninterest Expense Noninterest expense was $67.4 million and $201.0 million for the three and nine months ended September 30, 2005, respectively, in comparison to $58.4 million and $166.4 million for the comparable periods in 2004. Our efficiency ratio increased to 62.92% and 64.83% for the three and nine months ended September 30, 2005, respectively, from 59.83% and 57.67% for the comparable periods in 2004. The efficiency ratio is used by the financial services industry to measure an organization's operating efficiency. The efficiency ratio represents the ratio of noninterest expense to net interest income and noninterest income. The increases in noninterest expense and our efficiency ratio for 2005 were primarily attributable to increases in expenses resulting from our 2004 and 2005 acquisitions, and increases in salaries and employee benefits expense, information technology expense, expenses and losses, net of gains, on other real estate, and other expense. Salaries and employee benefits expense was $35.7 million and $103.1 million for the three and nine months ended September 30, 2005, respectively, in comparison to $29.9 million and $85.8 million for the comparable periods in 2004. We attribute the overall increase to increased salaries and employee benefits expenses associated with an aggregate of 26 additional branches acquired in 2004 and 2005, five de novo branches opened in 2004 and 2005, in addition to generally higher salary and employee benefit costs associated with employing and retaining qualified personnel, including enhanced incentive compensation and employee benefits plans. Our number of employees on a full-time equivalent basis increased to 2,238 at September 30, 2005, from 2,028 at September 30, 2004. Occupancy, net of rental income, and furniture and equipment expense totaled $9.3 million and $27.6 million for the three and nine months ended September 30, 2005, respectively, in comparison to $8.8 million and $26.5 million for the comparable periods in 2004. The increase is primarily attributable to higher levels of expense resulting from our acquisitions in 2004 and 2005, which added 26 branch offices, and the opening of five de novo branch offices in 2004 and 2005, as discussed above. The increase is also attributable to increased technology equipment expenditures, continued expansion and renovation of certain corporate and branch offices, including additional production and administrative offices, and increased depreciation expense associated with capital expenditures and acquisitions. Information technology and item processing fees were $9.1 million and $26.7 million for the three and nine months ended September 30, 2005, respectively, in comparison to $8.0 million and $24.0 million for the comparable periods in 2004. As more fully described in Note 6 to our Consolidated Financial Statements, First Services, L.P., a limited partnership indirectly owned by our Chairman and members of his immediate family, provides information technology and operational support services to our subsidiaries and us. Information technology fees also include fees paid to outside servicers associated with our mortgage lending division and our small business lending and institutional money management subsidiaries. We attribute the level of fees to the additional branch offices provided by our recent acquisitions and de novo branch office openings, deconversion costs from other providers associated with our acquisitions, growth and technological advancements consistent with our product and service offerings, continued expansion and upgrades to technological equipment, networks and communication channels, partially offset by expense reductions resulting from information technology conversions of our acquisitions completed in 2004, as well as the achievement of certain efficiencies associated with the implementation of various technology projects. The information technology conversions of CCB, CIB Bank and FBA were completed in September 2004, February 2005 and June 2005, respectively. Legal, examination and professional fees were $2.3 million and $6.7 million for the three and nine months ended September 30, 2005, respectively, in comparison to $1.6 million and $4.9 million for the comparable periods in 2004. The continued expansion of overall corporate activities, the ongoing professional services utilized by certain of our acquired entities, and increased legal fees associated with commercial loan documentation, collection efforts and certain defense litigation costs primarily related to acquired entities have all contributed to the overall expense levels in 2004 and 2005. The increase in 2005 is also attributable to $471,000 of fees paid for accounting and other services, including operational and systems support, provided by the seller of CIB Bank pursuant to a service agreement to provide services from the November 2004 sale date through the system conversion date in February 2005. Amortization of intangibles associated with the purchase of subsidiaries was $1.2 million and $3.5 million for the three and nine months ended September 30, 2005, respectively, in comparison to $733,000 and $2.0 million for the comparable periods in 2004. The increase is attributable to core deposit intangibles associated with our acquisitions of CCB and CIB Bank completed in 2004 and our acquisition of FBA completed in April 2005. Communications and advertising and business development expenses were $2.1 million and $6.5 million for the three and nine months ended September 30, 2005, respectively, compared to $1.8 million and $5.2 million for the comparable periods in 2004. The expansion of our sales, marketing and product group in 2004 and broadened advertising campaigns have contributed to higher expenditures and are consistent with our continued focus on expanding our banking franchise and the products and services available to our customers. Our spring and fall advertising campaigns have contributed to the increase in 2005. We continue our efforts to manage these expenses through renegotiation of contracts, enhanced focus on advertising and promotional activities in markets that offer greater benefits, as well as ongoing cost containment efforts. Charitable contributions expense was $111,000 and $1.8 million for the three and nine months ended September 30, 2005, respectively, compared to $294,000 and $424,000 for the comparable periods in 2004. The increase is primarily attributable to a $1.5 million contribution in May 2005 to an urban revitalization development project located in the city of St. Louis. In exchange for this contribution, we received Missouri state tax credits that will be utilized to reduce certain state income taxes. Other expense was $6.3 million and $20.7 million for the three and nine months ended September 30, 2005, respectively, in comparison to $6.0 million and $13.7 million for the comparable periods in 2004. Other expense encompasses numerous general and administrative expenses including insurance, freight and courier services, correspondent bank charges, miscellaneous losses and recoveries, expenses on other real estate owned, memberships and subscriptions, transfer agent fees, sales taxes and travel, meals and entertainment. The increase is primarily attributable to: >> an increase of $3.7 million in expenditures and losses, net of gains, on other real estate. Gains, net of losses and expenses, on other real estate were $76,000 for the third quarter of 2005. Expenditures and losses, net of gains, on other real estate were $532,000 for the nine months ended September 30, 2005 and included expenses of $812,000 and $170,000 in the second and third quarters of 2005, respectively, in preparation for the sale of a parcel of other real estate acquired with the acquisition of CIB Bank. These expenditures were partially offset by approximately $413,000 of gains recorded on the sale of three holdings of other real estate during the first and second quarters of 2005, and a $307,000 gain on the sale of an additional holding in the third quarter of 2005. Gains, net of losses and expenses, on other real estate were $24,000 and $3.2 million for the three and nine months ended September 30, 2004, and included a $2.7 million gain recorded in the first quarter of 2004 on the sale of a residential and recreational development property that was transferred to other real estate in January 2003 and approximately $390,000 of gains recorded on the sale of two additional holdings of other real estate in the second quarter of 2004; >> increased losses and adjustments to the carrying value of certain affordable housing credit partnership investments in 2005; and >> expenses associated with continued growth and expansion of our banking franchise, including our de novo branch offices and acquisitions completed during 2004 and 2005, particularly CIB Bank in November 2004. Provision for Income Taxes The provision for income taxes was $13.3 million and $41.6 million for the three and nine months ended September 30, 2005, respectively, in comparison to $12.0 million and $34.8 million for the comparable periods in 2004. The effective tax rate was 32.5% and 35.2% for the three and nine months ended September 30, 2005, respectively, in comparison to 37.7% and 35.2% for the comparable periods in 2004. In September 2005, we recorded a reversal of a $3.1 million state tax reserve, and in June 2004, we recorded a reversal of a $2.8 million tax reserve that was no longer deemed necessary as a result of the resolution of a potential tax liability. Excluding these transactions, the effective tax rate was 37.4% and 36.9% for the three and nine months ended September 30, 2005, respectively, in comparison to 37.7% and 38.1% for the comparable periods in 2004. The lower effective tax rate in 2005, after adjusting for the nonrecurring transactions, was primarily the result of the utilization of certain state tax credits. Interest Rate Risk Management We utilize derivative financial instruments to assist in our management of interest rate sensitivity by modifying the repricing, maturity and option characteristics of certain assets and liabilities. The derivative financial instruments we held as of September 30, 2005 and December 31, 2004 are summarized as follows:
September 30, 2005 December 31, 2004 ----------------------- ---------------------- Notional Credit Notional Credit Amount Exposure Amount Exposure ------ -------- ------ -------- (dollars expressed in thousands) Cash flow hedges..................................... $300,000 199 500,000 1,233 Fair value hedges.................................... 25,000 82 276,200 9,609 Interest rate floor agreement........................ 100,000 146 -- -- Interest rate lock commitments....................... 8,700 -- 5,400 -- Forward commitments to sell mortgage-backed securities......................... 50,000 -- 34,000 -- ======== ==== ======= =====
The notional amounts of our derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a measure of our credit exposure through our use of these instruments. The credit exposure represents the loss we would incur in the event the counterparties failed completely to perform according to the terms of the derivative financial instruments and the collateral held to support the credit exposure was of no value. During the three months ended September 30, 2005, we realized net interest expense of $626,000 on our derivative financial instruments, whereas during the nine months ended September 30, 2005, we realized net interest income of $3.3 million on our derivative financial instruments. For the three and nine months ended September 30, 2004, we realized net interest income of $13.0 million and $44.7 million, respectively, on our derivative financial instruments. The decreased earnings are primarily attributable to an increase in prevailing interest rates that began in mid-2004 and has continued into 2005, the maturity of $800.0 million notional amount of interest rate swap agreements during 2004 and $200.0 million in March 2005, and the termination of $150.0 million and $101.2 million of interest rate swap agreements designated as fair value hedges in February 2005 and May 2005, respectively, as further discussed below. Although the Company has implemented other methods to mitigate the reduction in net interest income, as further discussed below, the maturity and termination of the swap agreements has resulted in a compression of our net interest margin of approximately 66 basis points and 69 basis points for the three and nine months ended September 30, 2005, respectively, in comparison to the comparable periods in 2004, and will result in a reduction of future net interest income and further compression of our net interest margin unless interest rates increase. We recorded net losses on derivative instruments, which are included in noninterest income in our consolidated statements of income, of $403,000 and $993,000 for the three and nine months ended September 30, 2005, in comparison to net losses of $401,000 and $856,000 for the comparable periods in 2004, respectively. The net losses recorded in 2005 reflect changes in the value of our fair value hedges and the underlying hedged liabilities during 2005 until the termination of the $150.0 million of interest rate swap agreements designated as fair value hedges in February 2005, and the change in the value of our interest rate floor agreement entered into in September 2005, as further discussed below. Cash Flow Hedges. During September 2000, March 2001, April 2001, March 2002 and July 2003, we entered into interest rate swap agreements of $600.0 million, $200.0 million, $175.0 million, $150.0 million and $200.0 million notional amount, respectively, to effectively lengthen the repricing characteristics of certain interest-earning assets to correspond more closely with their funding source with the objective of stabilizing cash flow, and accordingly, net interest income over time. The underlying hedged assets are certain loans within our commercial loan portfolio. The swap agreements, which have been designated as cash flow hedges, provide for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the weighted average prime lending rate minus 2.70%, 2.82%, 2.82%, 2.80% and 2.85%, respectively. The terms of the swap agreements provide for us to pay and receive interest on a quarterly basis. In November 2001, we terminated $75.0 million notional amount of the swap agreements originally entered into in April 2001, which would have expired in April 2006, in order to appropriately modify our overall hedge position in accordance with our interest rate risk management program. In addition, the $150.0 million notional amount swap agreement that we entered into in March 2002 matured in March 2004, the $600.0 million notional amount swap agreements that we entered into in September 2000 matured in September 2004, and the $200.0 million notional amount swap agreement that we entered into in March 2001 matured on March 21, 2005. The amount receivable by us under the swap agreements was $2.4 million and $2.7 million at September 30, 2005 and December 31, 2004, respectively, and the amount payable by us under the swap agreements was $2.2 million and $1.4 million at September 30, 2005 and December 31, 2004, respectively. In October 2004, we implemented the guidance required by the FASB's Derivatives Implementation Group on Statement of Financial Accounting Standards No. 133 Implementation Issue No. G25, Cash Flow Hedges: Using the First-Payments-Received Technique in Hedging the Variable Interest Payments on a Group of Non-Benchmark-Rate-Based Loans, or DIG issue G25, and de-designated all of the specific pre-existing cash flow hedging relationships that were inconsistent with the guidance in DIG Issue G25. Consequently, the $4.1 million net gain associated with the de-designated cash flow hedging relationships at September 30, 2004, is being amortized to interest income over the remaining lives of the respective hedging relationships, which ranged from approximately six months to three years at the date of implementation. We elected to prospectively re-designate new cash flow hedging relationships based upon minor revisions to the underlying hedged items as required by the guidance in DIG Issue G25. The implementation of DIG Issue G25 did not and is not expected to have a material impact on our consolidated financial statements, results of operations or interest rate risk management program. The maturity dates, notional amounts, interest rates paid and received and fair value of our interest rate swap agreements designated as cash flow hedges as of September 30, 2005 and December 31, 2004 were as follows:
Notional Interest Rate Interest Rate Fair Maturity Date Amount Paid Received Value ------------- ------ ---- -------- ----- (dollars expressed in thousands) September 30, 2005: April 2, 2006................................... $ 100,000 3.93% 5.45% $ 543 July 31, 2007................................... 200,000 3.90 3.08 (5,039) --------- ------- $ 300,000 3.91 3.87 $(4,496) ========= ===== ===== ======= December 31, 2004: March 21, 2005.................................. $ 200,000 2.43% 5.24% $ 1,155 April 2, 2006................................... 100,000 2.43 5.45 2,678 July 31, 2007................................... 200,000 2.40 3.08 (2,335) --------- ------- $ 500,000 2.42 4.42 $ 1,498 ========= ===== ===== =======
Fair Value Hedges. We entered into the following interest rate swap agreements, designated as fair value hedges, to effectively shorten the repricing characteristics of certain interest-bearing liabilities to correspond more closely with their funding source with the objective of stabilizing net interest income over time: >> During January 2001, we entered into $150.0 million notional amount of five-year interest rate swap agreements that provided for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the three-month London Interbank Offering Rate. The underlying hedged liabilities were a portion of our other time deposits. The terms of the swap agreements provided for us to pay interest on a quarterly basis and receive interest on a semiannual basis. The amount receivable by us under the swap agreements was $3.9 million at December 31, 2004, and the amount payable by us under the swap agreements was $695,000 at December 31, 2004. Effective February 25, 2005, we terminated these swap agreements. The termination of the swap agreements resulted from an increasing level of ineffectiveness associated with the correlation of the hedge positions between the swap agreements and the underlying hedged liabilities that had been anticipated as the swap agreements neared their originally scheduled maturity dates in January 2006. The resulting $3.1 million basis adjustment of the underlying hedged liabilities is being recorded as interest expense over the remaining weighted average maturity of the underlying hedged liabilities of approximately ten months. >> During May 2002, March 2003 and April 2003, we entered into $55.2 million, $25.0 million and $46.0 million notional amount, respectively, of interest rate swap agreements that provide for us to receive a fixed rate of interest and pay an adjustable rate of interest equivalent to the three-month London Interbank Offering Rate plus 2.30%, 2.55% and 2.58%, respectively. The underlying hedged liabilities are a portion of our subordinated debentures. The terms of the swap agreements provide for us to pay and receive interest on a quarterly basis. There were no amounts receivable or payable by us at September 30, 2005 or December 31, 2004. Effective May 27, 2005, we terminated the $55.2 million and $46.0 million notional swap agreements in order to appropriately modify our future hedge position in accordance with our interest rate risk management program. The resulting $854,000 basis adjustment of the underlying hedged liabilities, in aggregate, is being recorded as a reduction of interest expense over the remaining maturities of the underlying hedged liabilities, which range from 26 to 28 years. The maturity dates, notional amounts, interest rates paid and received and fair value of our interest rate swap agreements designated as fair value hedges as of September 30, 2005 and December 31, 2004 were as follows:
Notional Interest Rate Interest Rate Fair Maturity Date Amount Paid Received Value ------------- ------ ---- -------- ----- (dollars expressed in thousands) September 30, 2005: March 20, 2033................................... $ 25,000 6.04% 8.10% $(1,220) ======== ===== ===== ======= December 31, 2004: January 9, 2006 (1).............................. $150,000 2.06% 5.51% $ 3,610 December 31, 2031 (2)............................ 55,200 4.27 9.00 2,171 March 20, 2033................................... 25,000 4.52 8.10 (929) June 30, 2033 (2)................................ 46,000 4.55 8.15 (1,689) -------- ------- $276,200 3.14 6.88 $ 3,163 ======== ===== ===== ======= ------------------ (1) The interest rate swap agreements were terminated effective February 25, 2005, as further discussed above. (2) The interest rate swap agreements were terminated effective May 27, 2005, as further discussed above.
Interest Rate Cap Agreements. During 2003 and 2004, we entered into five term repurchase agreements under master repurchase agreements with unaffiliated third parties, as further described in Note 9 to our Consolidated Financial Statements. The underlying securities associated with the term repurchase agreements are mortgage-backed securities and callable U.S. Government agency securities and are held by other financial institutions under safekeeping agreements. The term repurchase agreements were entered into with the objective of stabilizing net interest income over time and further protecting our net interest margin against changes in interest rates. The interest rate floor agreements included within the term repurchase agreements (and the interest rate cap agreements previously included within the term repurchase agreements) represent embedded derivative instruments which, in accordance with existing accounting literature governing derivative instruments, are not required to be separated from the term repurchase agreements and accounted for separately as a derivative financial instrument. As such, the term repurchase agreements are reflected in other borrowings in our consolidated balance sheets and the related interest expense is reflected as interest expense on other borrowings in our consolidated statements of income. As further described in Note 9 to our Consolidated Financial Statements, on March 21, 2005, in accordance with our interest rate risk management program, we modified our term repurchase agreements under master repurchase agreements with unaffiliated third parties to terminate the interest rate cap agreements embedded within the agreements and simultaneously enter into interest rate floor agreements, also embedded within the agreements. These modifications resulted in adjustments to the existing interest rate spread to LIBOR for the underlying agreements. The modified terms of the term repurchase agreements became effective during the second quarter of 2005. We did not incur any costs associated with the modifications of the agreements nor did the modifications result in a change to the accounting treatment of the embedded derivative instruments. Interest Rate Floor Agreement. On September 9, 2005, we entered into a $100.0 million notional amount three-year interest rate floor agreement in conjunction with our interest rate risk management program. The interest rate floor agreement provides for us to receive a quarterly fixed rate of interest of 5.00% should the three-month London Interbank Offering Rate equal or fall below the strike price of 2.00%. The carrying value of the interest rate floor agreement, which is included in other assets in our consolidated balance sheets, was $146,000 at September 30, 2005. Pledged Collateral. At September 30, 2005 and December 31, 2004, we had a $2.0 million and $5.0 million letter of credit, respectively, issued on our behalf to the counterparty and had pledged investment securities available for sale with a fair value of $3.9 million and $527,000, respectively, in connection with our interest rate swap agreements. At September 30, 2005, we had pledged cash of $891,000 as collateral in connection with our interest rate swap agreements. At December 31, 2004, we had accepted cash of $6.0 million as collateral in connection with our interest rate swap agreements. Interest Rate Lock Commitments / Forward Commitments to Sell Mortgage-Backed Securities. Derivative financial instruments issued by us consist of interest rate lock commitments to originate fixed-rate loans to be sold. Commitments to originate fixed-rate loans consist primarily of residential real estate loans. These net loan commitments and loans held for sale are hedged with forward contracts to sell mortgage-backed securities. The carrying value of these interest rate lock commitments included in other assets in our consolidated balance sheets was $366,000 and $20,000 at September 30, 2005 and December 31, 2004, respectively. Loans and Allowance for Loan Losses Interest earned on our loan portfolio represents the principal source of income for First Bank. Interest and fees on loans were 86.0% and 85.0% of total interest income for the three and nine months ended September 30, 2005, respectively, in comparison to 86.7% and 87.0% for the comparable periods in 2004. Total loans, net of unearned discount, increased $489.8 million to $6.63 billion, or 73.6% of total assets, at September 30, 2005, compared to $6.14 billion, or 70.3% of total assets, at December 31, 2004. The overall increase in loans, net of unearned discount, in 2005 is primarily attributable to internal loan growth and our acquisitions of FBA and IBOC, which provided loans, net of unearned discount, of $54.3 million and $113.5 million, respectively. The net increase is primarily attributable to: >> an increase of $249.9 million in our real estate mortgage portfolio primarily attributable to our acquisition of FBA, which provided real estate mortgage loans of $54.2 million, as well as internal growth within our loan portfolio; management's business strategy decision in mid-2003 to retain a portion of the new loan production in our residential real estate mortgage portfolio as a result of continued weak loan demand in other sectors of our loan portfolio and management's business strategy in the third quarter of 2005 to retain additional mortgage loan product production in our residential real estate mortgage portfolio, including 15-year fixed rate, conforming conventional adjustable rate mortgages and other similar products; and a home equity product line campaign that we held in mid-2004; >> an increase of $124.5 million in loans held for sale resulting from the timing of loan sales in the secondary mortgage market, coupled with an overall increase in loan origination volumes for the three and nine months ended September 30, 2005 as compared to the comparable periods in 2004, partially offset by the sale of certain acquired loans; and >> an increase of $103.5 million in our real estate construction and development portfolio resulting primarily from new loan originations and seasonal fluctuations on existing and available credit lines. Nonperforming assets include nonaccrual loans, restructured loans and other real estate. The following table presents the categories of nonperforming assets and certain ratios as of September 30, 2005 and December 31, 2004:
September 30, December 31, 2005 2004 ---- ---- (dollars expressed in thousands) Commercial, financial and agricultural: Nonaccrual......................................................... $ 7,762 10,147 Restructured....................................................... -- 4 Real estate construction and development: Nonaccrual......................................................... 8,816 13,435 Real estate mortgage: One-to-four family residential: Nonaccrual...................................................... 9,993 9,881 Restructured.................................................... 10 11 Multi-family residential loans: Nonaccrual...................................................... 700 434 Commercial real estate loans: Nonaccrual...................................................... 39,616 50,671 Lease financing: Nonaccrual......................................................... 760 907 Consumer and installment: Nonaccrual......................................................... 166 310 ---------- --------- Total nonperforming loans................................... 67,823 85,800 Other real estate.................................................... 2,747 4,030 ---------- --------- Total nonperforming assets.................................. $ 70,570 89,830 ========== ========= Loans, net of unearned discount...................................... $6,627,810 6,137,968 ========== ========= Loans past due 90 days or more and still accruing.................... $ 2,779 28,689 ========== ========= Ratio of: Allowance for loan losses to loans................................. 2.10% 2.46% Nonperforming loans to loans....................................... 1.02 1.40 Allowance for loan losses to nonperforming loans................... 205.64 175.65 Nonperforming assets to loans and other real estate................ 1.06 1.46 ========== =========
Nonperforming loans, consisting of loans on nonaccrual status and certain restructured loans, were $67.8 million at September 30, 2005, in comparison to $74.3 million at June 30, 2005, $79.8 million at March 31, 2005 and $85.8 million at December 31, 2004. Other real estate owned was $2.7 million, $2.0 million, $1.8 million and $4.0 million at September 30, 2005, June 30, 2005, March 31, 2005 and December 31, 2004, respectively. Nonperforming assets, consisting of nonperforming loans and other real estate owned, improved by $5.7 million, or 7.5%, during the third quarter of 2005, and $19.3 million, or 21.4%, during the first nine months of 2005, to $70.6 million at September 30, 2005 compared to $76.3 million at June 30, 2005, $81.6 million at March 31, 2005 and $89.8 million at December 31, 2004. A significant portion of nonperforming assets includes nonperforming loans associated with our acquisition of CIB Bank, which have decreased to $32.8 million, or 48.4% of our total nonperforming loans, at September 30, 2005, from $42.9 million at June 30, 2005, $43.7 million at March 31, 2005, and $50.5 million at December 31, 2004. Nonperforming loans were 1.02% of loans, net of unearned discount, at September 30, 2005, compared to 1.18%, 1.30% and 1.40% at June 30, 2005, March 31, 2005 and December 31, 2004, respectively. Additionally, loans past due 90 days or more and still accruing interest decreased $25.9 million to $2.8 million at September 30, 2005 from $28.7 million at December 31, 2004. The decrease in nonperforming loans and past due loans during the nine months ended September 30, 2005 primarily resulted from: our continued emphasis on improving asset quality; the sale of approximately $14.3 million of certain acquired nonperforming loans, specifically $2.8 million and $11.5 million during the first and second quarters of 2005, respectively; a reduction in net loan charge-offs, which decreased $6.1 million and $13.9 million for the three and nine months ended September 30, 2005, respectively, compared to the comparable periods in 2004; strengthening of certain loans; and significant loan payoffs and/or external refinancing of various credits, including $97.3 million of loan payoffs on 14 credit relationships during the first and second quarters of 2005. A portion of the loan payoffs and sales during the first quarter of 2005 pertaining to certain acquired nonperforming loans that were classified as loans held for sale as of December 31, 2004 contributed to a reallocation of the purchase price on our acquisition of Hillside, as further discussed in Note 2 to our Consolidated Financial Statements. Additionally, we recorded a write-down on an acquired parcel of other real estate owned to its estimated fair value based upon additional data received. This $1.6 million write-down on other real estate owned, which was also recorded as an acquisition-related adjustment in the first quarter of 2005 and is further discussed in Note 2 to our Consolidated Financial Statements, further contributed to the decrease in nonperforming assets. Net loan charge-offs decreased to $1.8 million and $4.7 million for the three and nine months ended September 30, 2005, respectively, compared to $7.9 million and $18.6 million for the comparable periods in 2004. Loan charge-offs were $5.4 million and $20.4 million for the three and nine months ended September 30, 2005, respectively, in comparison to $12.5 million and $36.8 million for the comparable periods in 2004. Loan recoveries were $3.6 million and $15.7 million for the three and nine months ended September 30, 2005, respectively, in comparison to $4.6 million and $18.1 million for the comparable periods in 2004. The allowance for loan losses was $139.5 million at September 30, 2005, compared to $140.2 million at June 30, 2005, $144.2 million at March 31, 2005 and $150.7 million at December 31, 2004. Our allowance for loan losses as a percentage of loans, net of unearned discount, was 2.10% at September 30, 2005, compared to 2.22% at June 30, 2005, 2.34% at March 31, 2005 and 2.46% at December 31, 2004. Our allowance for loan losses as a percentage of nonperforming loans was 205.64% at September 30, 2005, compared to 188.77% at June 30, 2005, 180.71% at March 31, 2005 and 175.65% at December 31, 2004. We continue to closely monitor our loan portfolio and address the ongoing challenges posed by the economic environment, including reduced loan demand within certain sectors of our loan portfolio. We consider this in our overall assessment of the adequacy of the allowance for loan losses. Each month, the credit administration department provides management with detailed lists of loans on the watch list and summaries of the entire loan portfolio by risk rating. These are coupled with analyses of changes in the risk profile of the portfolio, changes in past-due and nonperforming loans and changes in watch list and classified loans over time. In this manner, we continually monitor the overall increases or decreases in the level of risk in the portfolio. Factors are applied to the loan portfolio for each category of loan risk to determine acceptable levels of allowance for loan losses. In addition, a quarterly evaluation of each lending unit is performed based on certain factors, such as lending personnel experience, recent credit reviews, loan concentrations and other factors. Based on this evaluation, changes to the allowance for loan losses may be required due to the perceived risk of particular portfolios. The calculated allowance required for the portfolio is then compared to the actual allowance balance to determine the provisions necessary to maintain the allowance at appropriate levels. In addition, management exercises a certain degree of judgment in its analysis of the overall adequacy of the allowance for loan losses. In its analysis, management considers the change in the portfolio, including growth, composition, the ratio of net loans to total assets, and the economic conditions of the regions in which we operate. Based on this quantitative and qualitative analysis, adjustments are made to the allowance for loan losses. Such adjustments are reflected in our consolidated statements of income. Changes in the allowance for loan losses for the three and nine months ended September 30, 2005 and 2004 were as follows:
Three Months Ended Nine Months Ended September 30, September 30, -------------------- --------------------- 2005 2004 2005 2004 ---- ---- ---- ---- (dollars expressed in thousands) Balance, beginning of period....................... $140,164 120,966 150,707 116,451 Acquired allowance for loan losses................. 1,065 7,379 1,484 7,379 Other adjustments (1)(2)......................... -- -- -- (479) -------- -------- -------- -------- 141,229 128,345 152,191 123,351 -------- -------- -------- -------- Loans charged-off.................................. (5,401) (12,465) (20,422) (36,760) Recoveries of loans previously charged-off......... 3,643 4,590 15,702 18,129 -------- -------- -------- -------- Net loan charge-offs............................. (1,758) (7,875) (4,720) (18,631) -------- -------- -------- -------- Provision for loan losses.......................... -- 7,500 (8,000) 23,250 -------- -------- -------- -------- Balance, end of period............................. $139,471 127,970 139,471 127,970 ======== ======== ======== ======== --------------- (1) In December 2003, we established a $1.0 million specific reserve for estimated losses on a $5.3 million letter of credit that was recorded in accrued and other liabilities in our consolidated balance sheets. In January 2004, the letter of credit was fully funded as a loan and the related $1.0 million specific reserve was reclassified from accrued and other liabilities to the allowance for loan losses. (2) In June 2004, we reclassified $1.5 million from our allowance for loan losses to accrued and other liabilities to establish a specific reserve associated with the commercial leasing portfolio sale and related recourse obligations for certain leases sold.
Liquidity Our liquidity is the ability to maintain a cash flow that is adequate to fund operations, service debt obligations and meet obligations and other commitments on a timely basis. We receive funds for liquidity from customer deposits, loan payments, maturities of loans and investments, sales of investments and earnings. In addition, we may avail ourselves of other sources of funds by issuing certificates of deposit in denominations of $100,000 or more, borrowing federal funds, selling securities under agreements to repurchase and utilizing borrowings from the Federal Home Loan Bank and other borrowings, including our term loan and our revolving credit line. The aggregate funds acquired from these sources were $1.67 billion and $1.42 billion at September 30, 2005 and December 31, 2004, respectively. The following table presents the maturity structure of these other sources of funds, which consists of certificates of deposit of $100,000 or more and other borrowings, including our notes payable, at September 30, 2005:
Certificates of Deposit Other of $100,000 or More Borrowings Total ------------------- ---------- ----- (dollars expressed in thousands) Three months or less..................................... $ 304,411 179,399 483,810 Over three months through six months..................... 211,873 -- 211,873 Over six months through twelve months.................... 254,008 56,000 310,008 Over twelve months....................................... 247,763 413,300 661,063 ---------- ------- --------- Total............................................... $1,018,055 648,699 1,666,754 ========== ======= =========
In addition to these sources of funds, First Bank has established a borrowing relationship with the Federal Reserve Bank of St. Louis. This borrowing relationship, which is secured by commercial loans, provides an additional liquidity facility that may be utilized for contingency purposes. At September 30, 2005 and December 31, 2004, First Bank's borrowing capacity under the agreement was approximately $763.8 million and $778.7 million, respectively. In addition, First Bank's borrowing capacity through its relationship with the Federal Home Loan Bank was approximately $473.4 million and $505.2 million at September 30, 2005 and December 31, 2004, respectively. Exclusive of the Federal Home Loan Bank advances outstanding of $39.3 million and $35.6 million at September 30, 2005 and December 31, 2004, respectively, which represent advances assumed in conjunction with various acquisitions, First Bank had no amounts outstanding under its borrowing arrangement with the Federal Home Loan Bank at September 30, 2005 and December 31, 2004. In addition to our owned banking facilities, we have entered into long-term leasing arrangements to support our ongoing activities. The required payments under such commitments and other contractual obligations at September 30, 2005, were as follows:
Less than 1-3 3-5 Over 1 Year Years Years 5 Years Total ------ ----- ----- ------- ----- (dollars expressed in thousands) Operating leases............................... $ 10,335 15,381 9,492 18,669 53,877 Certificates of deposit (1).................... 2,044,315 797,113 161,884 30,376 3,033,688 Other borrowings (1)........................... 235,399 393,500 13,800 6,000 648,699 Subordinated debentures (1).................... -- -- -- 215,433 215,433 Other contractual obligations.................. 2,409 293 48 20 2,770 ---------- --------- ------- ------- --------- Total..................................... $2,292,458 1,206,287 185,224 270,498 3,954,467 ========== ========= ======= ======= ========= --------------- (1) Amounts exclude the related interest expense accrued on these obligations as of September 30, 2005.
Management believes the available liquidity and operating results of First Bank will be sufficient to provide funds for growth and to permit the distribution of dividends to us sufficient to meet our operating and debt service requirements, both on a short-term and long-term basis, and to pay interest on the subordinated debentures that we issued to our affiliated statutory and business financing trusts. Effects of New Accounting Standards In November 2003, the Emerging Issues Task Force, or EITF, reached a consensus on certain disclosure requirements under EITF Issue No 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The new disclosure requirements apply to investment in debt and marketable equity securities that are accounted for under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. Effective for fiscal years ending after December 15, 2003, companies are required to disclose information about debt or marketable equity securities with market values below carrying values. We previously adopted the disclosure requirements of EITF Issue No. 03-1. In March 2004, the EITF came to a consensus regarding EITF 03-1. Securities in scope are those subject to SFAS 115 and SFAS 124. The EITF adopted a three-step model that requires management to determine if impairment exists, decide whether it is other than temporary, and record other-than-temporary losses in earnings. In September 2004, the Financial Accounting Standards Board, or FASB, approved issuing a Staff Position to delay the requirement to record impairment losses under EITF 03-1, but broadened the scope to include additional types of securities. As proposed, the delay would have applied only to those debt securities described in paragraph 16 of EITF 03-1, the Consensus that provides guidance for determining whether an investment's impairment is other than temporary and should be recognized in income. On June 29, 2005, the FASB directed the EITF to issue EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, as final. On November 3, 2005, the FASB issued FASB Staff Position, or FSP, FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The FSP addresses determining when an investment is considered impaired and whether that impairment is other than temporary, and measuring an impairment loss. The FSP also addresses the accounting after an entity recognizes an other-than-temporary impairment, and requires certain disclosures about unrealized losses that the entity did not recognize as other-than-temporary impairments. The FSP is effective for reporting periods beginning after December 15, 2005. We are currently evaluating the requirements of FSP FAS 115-1 and FAS 124-1 and do not expect them to have a material effect on our financial condition or results of operations. In December 2003, the Accounting Standards Executive Committee, or AcSEC, issued SOP 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, effective for loans acquired in fiscal years beginning after December 15, 2004. The scope of SOP 03-3 applies to problem loans that have been acquired, either individually in a portfolio, or in an acquisition. These loans must have evidence of credit deterioration and the purchaser must not expect to collect contractual cash flows. SOP 03-3 updates Practice Bulletin No. 6, Amortization of Discounts on Certain Acquired Loans, for more recently issued literature, including FASB Statements No. 114, Accounting by Creditors for Impairment of a Loan; No. 115, Accounting for Certain Investments in Debt and Equity Securities; and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Additionally, it addresses FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, which requires that discounts be recognized as an adjustment of yield over a loan's life. SOP 03-3 states that an institution may no longer display discounts on purchased loans within the scope of SOP 03-3 on the balance sheet and may not carry over the allowance for loan losses. For those loans within the scope of SOP 03-3, this statement clarifies that a buyer cannot carry over the seller's allowance for loan losses for the acquisition of loans with credit deterioration. Loans acquired with evidence of deterioration in credit quality since origination will need to be accounted for under a new method using an income recognition model. This prohibition also applies to purchases of problem loans not included in a purchase business combination, which would include syndicated loans purchased in the secondary market and loans acquired in portfolio purchases. We implemented SOP 03-3 in conjunction with our acquisition of FBA, which we completed on April 29, 2005, and our acquisition of IBOC, which we completed on September 30, 2005. At September 30, 2005, the carrying value of acquired problem loans that are being accounted for under SOP 03-3 totaled $1.8 million in aggregate, and were acquired with our acquisition of IBOC on September 30, 2005. Consequently, the implementation of SOP 03-3, as it pertains to these transactions, did not have a material impact on our consolidated financial statements or results of operations. We will continue to evaluate the impact of SOP 03-3 on our consolidated financial statements and results of operations as it relates to the recently announced acquisitions described in Note 2 to our Consolidated Financial Statements and future transactions. In May 2005, the FASB issued SFAS No. 154 -- Accounting Changes and Error Corrections. SFAS No. 154, a replacement of APB Opinion No. 20 -- Accounting Changes and FASB Statement No. 3 -- Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 requires retrospective application for voluntary changes in accounting principles unless it is impracticable to do so. SFAS No. 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005. Early application is permitted for accounting changes and corrections of errors during fiscal years beginning after June 1, 2005. We are currently evaluating the requirements of SFAS No. 154 and do not expect it to have a material effect on our financial condition or results of operations. In July 2005, the FASB issued an exposure draft titled Accounting for Uncertain Tax Positions, an Interpretation of SFAS No. 109 -- Accounting for Income Taxes. This exposure draft addresses accounting for tax uncertainties that arise when a position that an entity takes on its tax return may be different from the position that the taxing authority may take, and provides guidance about the accounting for tax benefits associated with uncertain tax positions, classification of a liability recognized for those tax positions, and interim reporting considerations. The proposed interpretation is not expected to be issued until the first quarter of 2006, at which time the FASB will decide on a revised effective date and transition period. We are currently evaluating the requirements of the exposure draft to determine their impact on our financial condition and results of operations. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 31, 2004, our risk management program's simulation model indicated a loss of projected net interest income in the event of a decline in interest rates. We are "asset-sensitive," indicating that our assets would generally reprice with changes in rates more rapidly than our liabilities. While a decline in interest rates of less than 100 basis points was projected to have a relatively minimal impact on our net interest income, an instantaneous, parallel decline in the interest yield curve of 100 basis points indicated a pre-tax projected loss of approximately 8.9% in net interest income, based on assets and liabilities at December 31, 2004. At September 30, 2005, we remain in an "asset-sensitive" position and thus, remain subject to a higher level of risk in a declining interest rate environment. Although we do not anticipate that instantaneous shifts in the yield curve as projected in our simulation model are likely, these are indications of the effects that changes in interest rates would have over time. Our asset-sensitive position, coupled with declines in income associated with our interest rate swap agreements and increases in prevailing interest rates beginning in mid-2004 and continuing in 2005, is reflected in our net interest margin for the three and nine months ended September 30, 2005 as compared to the comparable periods in 2004 and further discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." During the three and nine months ended September 30, 2005, our asset-sensitive position and overall susceptibility to market risks have not changed materially. However, prevailing interest rates have continued to rise during the three and nine months ended September 30, 2005. ITEM 4 - CONTROLS AND PROCEDURES Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our "disclosure controls and procedures" (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially effected, or are reasonably likely to materially affect, the Company's control over financial reporting. Part II - OTHER INFORMATION ITEM 6 - EXHIBITS The exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. Exhibit Number Description -------------- ----------- 10 Amended and Restated Secured Credit Agreement ($100.0 million Term Loan Facility, $15.0 million Revolving Credit Facility and $7.5 million Letter of Credit Facility), dated as of August 11, 2005, by and among First Banks, Inc. and Wells Fargo Bank, National Association, as Agent, JP Morgan Chase Bank, N.A., LaSalle Bank National Association, The Northern Trust Company, Union Bank of California, N.A., Fifth Third Bank (Chicago) and U.S. Bank National Association - filed herewith. 31.1 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Executive Officer - filed herewith. 31.2 Rule 13a-14(a) / 15d-14(a) Certifications of Chief Financial Officer - filed herewith. 32.1 Section 1350 Certifications of Chief Executive Officer - filed herewith. 32.2 Section 1350 Certifications of Chief Financial Officer - filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 14, 2005 FIRST BANKS, INC. By: /s/ Allen H. Blake ------------------------------------------ Allen H. Blake President and Chief Executive Officer (Principal Executive Officer) By: /s/ Steven F. Schepman ------------------------------------------ Steven F. Schepman Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT 31.1 CERTIFICATIONS REQUIRED BY RULE 13a-14(a) OR RULE 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934 I, Allen H. Blake, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q (the "Report") of First Banks, Inc. (the "Registrant"); 2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and c) Disclosed in this Report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: November 14, 2005 FIRST BANKS, INC. By: /s/ Allen H. Blake ------------------------------------------ Allen H. Blake President and Chief Executive Officer (Principal Executive Officer) EXHIBIT 31.2 CERTIFICATIONS REQUIRED BY RULE 13a-14(a) OR RULE 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934 I, Steven F. Schepman, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q (the "Report") of First Banks, Inc. (the "Registrant"); 2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; 4. The Registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; b) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and c) Disclosed in this Report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: November 14, 2005 FIRST BANKS, INC. By: /s/ Steven F. Schepman ------------------------------------------ Steven F. Schepman Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT 32.1 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 I, Allen H. Blake, President and Chief Executive Officer of First Banks, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2005 (the "Report") fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 14, 2005 By: /s/ Allen H. Blake ------------------------------------------ Allen H. Blake President and Chief Executive Officer (Principal Executive Officer) EXHIBIT 32.2 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 I, Steven F. Schepman, Chief Financial Officer of First Banks, Inc. (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: (1) The Quarterly Report on Form 10-Q of the Company for the quarterly period ended September 30, 2005 (the "Report") fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 14, 2005 By: /s/ Steven F. Schepman ------------------------------------------ Steven F. Schepman Chief Financial Officer (Principal Financial and Accounting Officer) EX-10 2 creditagree.txt EX-10 Exhibit 10 AMENDED AND RESTATED SECURED CREDIT AGREEMENT ($100,000,000 Term Loan Facility, $15,000,000 Revolving Loan Facility and $7,500,000 Letter of Credit Facility) dated as of August 11, 2005 among FIRST BANKS, INC. and THE LENDERS SIGNATORY HERETO and WELLS FARGO BANK, NATIONAL ASSOCIATION as Agent WELLS FARGO BANK, NATIONAL ASSOCIATION as Sole Lead Arranger and Sole Book Runner
TABLE OF CONTENTS ARTICLE I. DEFINITIONS AND ACCOUNTING TERMS................................................................1 Section 1.1 Defined Terms.......................................................................1 Section 1.2 Other Interpretive Provisions......................................................10 ARTICLE II. COMMITMENTS OF THE LENDERS; BORROWING, CONVERSION AND LETTER OF CREDIT PROCEDURES........................................................10 Section 2.1 Commitments........................................................................10 2.1.1. Revolving Credit Commitment........................................................10 2.1.2. Term Loan Commitment...............................................................11 2.1.3. Letter of Credit Commitment........................................................11 Section 2.2 Revolving Loan Procedures..........................................................11 2.2.1 Borrowing Procedures...............................................................11 2.2.2 Conversion of Principal to Eurodollar Rates........................................13 Section 2.3 Letters of Credit Procedures.......................................................15 2.3.1 Issuance/Lender Participation......................................................15 2.3.2 Payment of Amounts Drawn Under Letters of Credit...................................15 2.3.3 Special Account....................................................................16 2.3.4 Authorization for Borrowing........................................................17 Section 2.4 Second Term Loan Procedures........................................................17 Section 2.5 Use of Proceeds....................................................................18 ARTICLE III. EVIDENCING OF LOANS..........................................................................18 Section 3.1 Notes..............................................................................18 Section 3.2 Payment of Term Note...............................................................18 Section 3.3 Recordkeeping......................................................................18 ARTICLE IV. INTEREST......................................................................................19 Section 4.1 Interest Rates.....................................................................19 Section 4.2 Default Interest Rate..............................................................19 Section 4.3 Interest Payments..................................................................19 Section 4.4 Making of Payments.................................................................20 Section 4.5 Payment on Nonbusiness Days........................................................20 Section 4.6 Computation of Interest and Fees...................................................20 Section 4.7 Generally..........................................................................20 ARTICLE V. FEES, REDUCTIONS AND PREPAYMENTS...............................................................21 Section 5.1 Term and Revolving Loan Commitment Fee.............................................21 Section 5.2 Letter of Credit Fees..............................................................21 Section 5.3 Termination or Reduction of the Revolving Credit Commitments.......................................................................22 Section 5.4 Termination or Reduction of Letter of Credit Commitment............................22 Section 5.5 Voluntary Prepayments..............................................................22 Section 5.6 Fees on Advances and Indemnity.....................................................22 Section 5.7 Capital Adequacy...................................................................24 Section 5.8 Failure of Any Lender to Make Advances.............................................25 ARTICLE VI. CONDITIONS PRECEDENT..........................................................................25 Section 6.1 Initial Conditions Precedent.......................................................25 Section 6.2 Conditions Precedent to All Advances...............................................27 ARTICLE VII. REPRESENTATIONS AND WARRANTIES...............................................................27 Section 7.1 Corporate Existence and Power......................................................27 Section 7.2 Authorization of Borrowing; No Conflict as to Law or Agreements........................................................................28 Section 7.3 Legal Agreements...................................................................28 Section 7.4 Subsidiaries.......................................................................28 Section 7.5 Financial Condition................................................................28 Section 7.6 Adverse Change.....................................................................29 Section 7.7 Litigation.........................................................................29 Section 7.8 Regulation U.......................................................................29 Section 7.9 Taxes..............................................................................29 Section 7.10 Titles.............................................................................29 Section 7.11 ERISA..............................................................................29 Section 7.12 Regulatory Matters.................................................................29 ARTICLE VIII. AFFIRMATIVE COVENANTS.......................................................................30 Section 8.1 Reporting Requirements.............................................................30 Section 8.2 Books and Records; Inspection and Examination......................................31 Section 8.3 Compliance with Laws...............................................................32 Section 8.4 Payment of Taxes and Other Claims..................................................32 Section 8.5 Operations.........................................................................32 Section 8.6 Insurance..........................................................................32 Section 8.7 Preservation of Corporate Existence................................................32 Section 8.8 Additional Collateral..............................................................32 Section 8.9 Notice of Acquisition..............................................................33 ARTICLE IX NEGATIVE COVENANTS.............................................................................33 Section 9.1 Liens..............................................................................33 Section 9.2 Indebtedness.......................................................................33 Section 9.3 Guaranties.........................................................................34 Section 9.4 Shareholder Redemptions............................................................34 Section 9.5 Acquisitions.......................................................................34 Section 9.6 Subordinated Debt..................................................................34 Section 9.7 Restrictions on Nature of Business.................................................34 Section 9.8 Negative Pledges; Subsidiary Restrictions..........................................35 Section 9.9 Issuance of Additional Stock.......................................................35 Section 9.10 Regulatory Matters.................................................................35 Section 9.11 Dividends..........................................................................35 ARTICLE X. FINANCIAL COVENANTS............................................................................36 Section 10.1 Total Risk Based Capital Ratio.....................................................36 Section 10.2 Tier I Risk Based Capital Ratio....................................................36 Section 10.3 Leverage Ratio.....................................................................36 Section 10.4 Minimum Return on Assets...........................................................36 Section 10.5 Maximum Non-Performing Assets......................................................36 Section 10.6 Allowance for Loan and Lease Losses................................................36 ARTICLE XI. EVENTS OF DEFAULT, RIGHTS AND REMEDIES........................................................36 Section 11.1 Events of Default..................................................................36 Section 11.2 Rights and Remedies................................................................39 Section 11.3 Offset.............................................................................40 ARTICLE XII THE AGENT.....................................................................................40 Section 12.1 Authorization......................................................................40 Section 12.2 Distribution of Payments and Proceeds..............................................40 Section 12.3 Expenses...........................................................................41 Section 12.4 Payments Received Directly by Lenders..............................................41 Section 12.5 Indemnification....................................................................42 Section 12.6 Limitations on Agent's Power.......................................................42 Section 12.7 Exculpation........................................................................42 Section 12.8 Agent and Affiliates...............................................................42 Section 12.9 Credit Investigation...............................................................43 Section 12.10 Resignation........................................................................43 Section 12.11 Assignments........................................................................43 Section 12.12 Participations.....................................................................44 Section 12.13 Disclosure of Information..........................................................45 ARTICLE XIII. MISCELLANEOUS...............................................................................45 Section 13.1 No Waiver, Cumulative Remedies.....................................................45 Section 13.2 Amendments, Etc....................................................................45 Section 13.3 Notice.............................................................................46 Section 13.4 Costs and Expenses.................................................................46 Section 13.5 Indemnification by Borrower........................................................46 Section 13.6 Execution in Counterparts..........................................................47 Section 13.7 Binding Effect, Assignment.........................................................47 Section 13.8 Governing Law......................................................................47 Section 13.9 Consent to Jurisdiction/Jury Wavier................................................47 Section 13.10 Severability of Provisions.........................................................48 Section 13.11 Prior Agreements...................................................................48 Section 13.12 Headings...........................................................................48 Section 13.13 No Oral Agreements.................................................................48
Exhibit A -- Borrower Pledge Agreement Exhibit B -- Term and Revolving Loan Commitment Amounts Exhibit C -- Compliance Certificate Exhibit D1 -- Application for Standby Letter of Credit Exhibit D2 -- Standby Letter of Credit Agreement Exhibit E -- Revolving Note Exhibit F -- San Francisco Company Guaranty Exhibit G -- San Francisco Company Security Agreement Exhibit H -- Term Loan Note Exhibit I -- Notice of Borrowing Exhibit J -- Notice of Conversion/Continuation Exhibit K -- Permissible Securities Exhibit L -- Notice of Permitted Acquisition Schedule 7.4 -- Subsidiaries Schedule 7.7 -- Litigation Schedule 9.1 -- Existing Liens Schedule 9.2 -- Indebtedness Schedule 9.3 -- Guaranties AMENDED AND RESTATED SECURED CREDIT AGREEMENT THIS AMENDED AND RESTATED SECURED CREDIT AGREEMENT (this "Agreement") dated as of August 11, 2005, is entered into by and among FIRST BANKS, INC., a Missouri corporation ("Borrower"), the financial institutions that have executed this Agreement as lenders (each individually a "Lender" and collectively the "Lenders"), and WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association, as Agent. WITNESSETH THAT: WHEREAS, pursuant to that certain Secured Credit Agreement dated as of August 14, 2003, as amended by First Amendment to Secured Credit Agreement dated as of August 12, 2004 (collectively the "Existing Credit Agreement"), each made by and between Borrower, Lenders and Agent, Lenders severally agreed to make available to Borrower a revolving credit facility in the amount of Seventy-Five Million Dollars ($75,000,000) and a revolving letter of credit facility in the amount of Twenty-Five Million Dollars ($25,000,000) upon the terms and conditions set forth in the Existing Credit Agreement; WHEREAS, Borrower has requested that Lenders severally make available a new term loan credit facility in the amount of One Hundred Million Dollars ($100,000,000), a new revolving credit facility in the amount of Fifteen Million Dollars ($15,000,000) and a new revolving letter of credit facility in the amount of Seven Million Five Hundred Thousand Dollars ($7,500,000) (collectively the "Requested Facilities"); WHEREAS, Borrower, Lenders and Agent desire to enter into this Amended and Restated Secured Credit Agreement in replacement of the Existing Credit Agreement, in its entirety, thereby making available to Borrower the Requested Facilities; and WHEREAS, the Lenders are willing severally to provide the Requested Facilities to Borrower, subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto hereby agree as follows: ARTICLE I. DEFINITIONS AND ACCOUNTING TERMS Section 1.1 Defined Terms. As used in this Agreement, the following ------------- terms have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): "Acquisition" shall mean any of (i) the acquisition by Borrower or any of its Subsidiaries of stock or other equity interest in any Person, (ii) the acquisition by any Person of stock or other equity interest in Borrower or any of its Subsidiaries, (iii) the consolidation or merger of any Person into Borrower or any of its Subsidiaries, (iv) the consolidation or merger of Borrower or any of its Subsidiaries into any Person, and (v) the transfer, outside of the ordinary course of business, of any assets of any other Person to Borrower or any of its Subsidiaries, or of Borrower or any of its Subsidiaries to any other Person. "Additional Lender" means a financial institution that becomes a Lender pursuant to the procedures set forth in Section 12.11(a). "Advance" means any advance by the Lenders to the Borrower pursuant to Article II. "Affiliate" means any Person (1) which directly or indirectly Controls, or is Controlled by, or is under common Control with, the Borrower or any Subsidiary; (2) which directly or indirectly beneficially owns or holds five percent (5%) or more of any class of voting stock of Borrower or any Subsidiary; or (3) five percent (5%) or more of the voting stock of which is directly or indirectly beneficially owned or held by Borrower or any Subsidiary. "Agent" means Wells Fargo Bank, National Association, acting in its capacity as Agent pursuant to Article XII hereof, or any duly appointed successor. "Agreement" has the meaning assigned to that term in the preamble of this Agreement. "Bank Business Day" means a day other than a Saturday, Sunday, United States national holiday or other day on which banks in Minnesota are permitted or required by law to close. "Bank Subsidiary" means any direct or indirect Subsidiary of the Borrower which is a bank or thrift institution, including, without limitation the financial institutions listed in Schedule 7.4 hereof and, beginning one year following the acquisition thereof, any bank or thrift institution subsequently becoming a direct or indirect Subsidiary of the Borrower. "Base Rate" means the rate of interest publicly announced from time to time by the Agent as its "prime" or "base" rate or, if the Agent ceases to announce a rate so designated, any similar successor rate designated by the Agent. Each change in the Base Rate shall be effective on the day the change in the "prime" or "base" rate is announced within Agent. "Borrower" has the meaning assigned to such term in the preamble of this Agreement. "Borrower Pledge Agreement" means the collateral pledge agreement in the form of Exhibit A pledging to the Agent for the ratable benefit of the Lenders all of the stock of San Francisco Company. "Borrowing" means any borrowing under Article II made to the Borrower by each of the Lenders severally. "Capitalized Lease" of a Person means any lease of property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with GAAP. "Closing Date" means the date upon which the last of the conditions precedent specified in Article VI shall be satisfied. "Collateral" means the Borrower's Special Account and all property which is subject or is to be subject to the Liens granted by the Borrower Pledge Agreement and the San Francisco Company Security Agreement. "Commitments" means the several (i) Term Loan Commitments of the Lenders in the aggregate original principal amount of One Hundred Million Dollars ($100,000,000); and (ii) Revolving Credit Commitments of Lenders in the aggregate principal amount of Fifteen Million Dollars ($15,000,000), as such amount may be reduced from time to time pursuant to Section 5.3. When used with reference to a particular Lender, "Commitment" means that Lender's obligation to make Advances in aggregate amounts equal to its Term and Revolving Credit Commitment Amounts. "Compliance Certificate" means a certificate in substantially the form of Exhibit C, or such other form as the Borrower and the Required Lenders may from time to time agree upon in writing, executed by the Chief Financial Officer of the Borrower and one (1) additional officer of the Borrower identified on the signature page to said Exhibit C, stating (i) that any financial statements delivered therewith have been prepared in accordance with GAAP, subject to year-end audit adjustments, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default and stating in reasonable details the facts with respect to such Default or Event of Default, (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the Financial Covenants, and (iv) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the other covenants. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. For the purposes of the foregoing definition, a shareholder of Borrower shall not be deemed to be directly or indirectly Controlling or Controlled by the Borrower or a Subsidiary, provided the person in question will not receive any proceeds from the Loans. "Default" means any of the events specified in Section 11.1, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied. "Equity Capital" means, as to Borrower or any Bank Subsidiary, the aggregate of its perpetual preferred stock (and related surplus), common stock, surplus (excluding all surplus related to perpetual preferred stock), undivided profits and capital reserves, plus its net unrealized holding gains (or minus its net realized holding losses) on available-for-sale securities. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereof. "ERISA Affiliate" means any trade or business (whether or not incorporated) which together with the Borrower would be treated as a single employer under Section 4001 of ERISA. "Eurodollar Business Day" means a Bank Business Day on which dealings in U.S. dollar deposits are carried on in the London interbank market. "Eurodollar Rate" means the annual rate equal to the sum of (i) the rate obtained by dividing (a) the rate (rounded up to the nearest 1/16 of 1%) determined by the Agent as of 11:00 a.m. London, England time on the second Eurodollar Business Day prior to the date such rate is to become effective to be the average rate at which U.S. dollar deposits are offered or available to banks in the London interbank market for funds to be made available on the first day of any Interest Period in an amount approximately equal to the amount for which a Eurodollar Rate quotation has been requested and maturing at the end of such Interest Period, by (b) a percentage equal to 100% minus the Federal Reserve System reserve requirement (expressed as a percentage) applicable to such deposits, and (ii) the applicable Margin. In making such determination, the Agent shall utilize Telerate page 3750 under the heading "British Bankers Association LIBOR rates" in the column designated "USD," as published by Bridge Information Systems, Inc., or such other comparable source as may be available to the Agent in the event such Telerate page is no longer published or readily available. "Eurodollar Rate Funding" means a Borrowing or any portion thereof, or any other portion of the principal balance of any of the Notes, that bears interest at a Eurodollar Rate. "Event of Default" means any of the events specified in Section 11.1, provided that any requirement for the giving of notice, the lapse of time, or both, or any other applicable condition, has been satisfied. "Existing Credit Agreement" has the meaning assigned to such term in the recitals to this Agreement. "Federal Funds Rate" means at any time an interest rate per annum equal to the weighted average of the rates for overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Bank Business Day, the average, determined by the Agent, of the quotations for such day for such transactions received by the Agent from three federal funds brokers of recognized standing selected by it, it being understood that the Federal Funds Rate for any day which is not a Bank Business Day shall be the Federal Funds Rate for the next preceding Bank Business Day. "Financial Covenants" means any covenant contained in Article X. "First Bank" means First Bank, a Missouri state bank. "Floating Rate" means, at any time, an annual rate equal to the greater of: (i) the Base Rate; or (ii) the Federal Funds Rate, plus fifty (50) basis points (0.50%). The Floating Rate shall change when and as the Base Rate or Federal Funds Rate changes. "Funded Debt" of the Borrower means (without duplication)(i) all indebtedness of the Borrower for borrowed money; (ii) indebtedness evidenced by bonds, notes or similar written debt instruments; and (iii) the face amount of all letters of credit and bankers' acceptances issued for the account of the Borrower, and, without duplication, all drafts drawn thereunder; provided, however, that in -------- ------- no event shall any calculation of Funded Debt include Subordinated Debt or debt of the type referred to in Section 9.2(b) or Section 9.2(c). "Funded Debt Ratio" means the ratio of Funded Debt to Net Income of the Borrower for the most recent period of four (4) fiscal quarters. "GAAP" means U.S. generally accepted accounting principles applied on a basis consistent with the accounting practices applied in the financial statements described in Section 7.5. "Interest Period" means, with respect to any Eurodollar Rate Funding (except as provided at Section 4.7 on the Closing Date of this Agreement), a period of one, two, three or six months beginning on a Eurodollar Business Day, as elected by the Borrower. Each Interest Period shall end on the day in the final month of such Interest Period that immediately precedes the date which numerically corresponds to the first day of such Interest Period, except that (i) if such final month has no numerically corresponding day, then the Interest Period shall end on the last Eurodollar Business Day of such month, and (ii) if an Interest Period would otherwise end on a day which is not a Eurodollar Business Day, such Interest Period shall end on the next following Eurodollar Business Day, unless such next following Eurodollar Business Day is the first Eurodollar Business Day of a month, in which case such Interest Period shall end on the next preceding Eurodollar Business Day. "L/C Application" means an Application for Standby Letter of Credit in the form of Exhibit D1, and the master Standby Letter of Credit Agreement in the form of Exhibit D2, which master Standby Letter of Credit Agreement is incorporated into each such Application for Standby Letter of Credit by reference. "L/C Margin" means an amount determined under Section 4.7 that is charged pursuant to Section 5.2. "Lender" or "Lenders" has the meaning assigned to such term in the preamble to this Agreement. "Letter of Credit" has the meaning provided in Section 2.1.3. "Letter of Credit Commitment" means Agent's commitment to issue Letters of Credit as provided in Section 2.3. "Letter of Credit Commitment Amount" means the sum of $7,500,000, as that amount may from time to time be adjusted pursuant to Section 5.4. "Letter of Credit Termination Date" means August 10, 2006. "Leverage Ratio" shall be defined and calculated in accordance with Federal Reserve Board Regulation Y in the case of the Borrower and in accordance with Section 38 of the Federal Deposit Insurance Act in the case of a Bank Subsidiary. "Lien" means any mortgage, deed of trust, lien, pledge, security interest or other charge or encumbrance, of any kind whatsoever, including but not limited to the interest of the lessor or titleholder under any Capitalized Lease, title retention contract or similar agreement. "Loan Documents" means this Agreement, the Notes, the Borrower Pledge Agreement, the San Francisco Company Guarantee and the San Francisco Company Security Agreement, as each may be renewed, extended, amended, rearranged, restructured, restated, replaced or otherwise modified from time to time. "Margin" means amounts determined pursuant to Section 4.7 that is added to other amounts to determine a Eurodollar Rate. "Maturity Date" means August 10, 2008. "Multiemployer Plan" means a Plan described in Section 4001(a) (3) of ERISA which covers employees of the Borrower or any of its Affiliates. "Net Income" has the meaning assigned to such term by GAAP, without reference to extraordinary items or adjustments caused solely by changes in applicable accounting principles. "Non-Performing Assets" of any Person means the sum of: (i) all loans and leases classified as past due 90 days or more and still accruing interest; (ii) all loans and leases classified as "non-accrual" and no longer accruing interest; (iii) all loans and leases classified as "restructured loans and leases"; (iv) without duplication, all property acquired in repossession or foreclosure and property acquired pursuant to in-substance foreclosure; and (v) if such Person is a Bank Subsidiary, all other "Non-Performing Assets," as reported in the then most recent call report of such Bank Subsidiary. "Note" means either a Revolving Note or a Term Note. "Notes" means, collectively, the Revolving Notes and the Term Notes. "Obligation of Reimbursement" has the meaning given in Section 2.3.2(a). "Obligations" means all debts, liabilities, obligations, covenants and duties of the Borrower arising under any of the Loan Documents, whether direct or indirect, absolute or contingent, due or to become due, and whether now existing or hereafter arising. "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Percentage" means, with respect to each Lender, the percentage so designated next to such Lender's name in Exhibit B, as such percentage may be adjusted from time to time pursuant to Section 12.11. "Permitted Acquisition" means any Acquisition by Borrower or any of its Subsidiaries, in each case so long as: (i) no Default or Event of Default is continuing at the time of such Acquisition, or would be caused by such Acquisition; (ii) all authorizations of governmental agencies, bodies or authorities which are necessary to approve the Acquisition have been obtained and are in full force and effect, or will be obtained contemporaneously with the earlier to occur of closing of such Acquisition and the making of any Advance for such purpose, and no further approval, consent, order or authorization of or designation, registration, declaration or filing with any governmental authority is required in connection therewith; (iii) in the case of any Acquisition that is a consolidation or merger, the continuing or surviving corporation shall be controlled by the Borrower immediately following the transaction; provided, however, that (A) -------- ------- a Subsidiary may merge with and into the Borrower or another Subsidiary, but (B) under no circumstances may the Borrower merge into or consolidate with any Subsidiary; and (iv) any notice required in connection with such Acquisition pursuant to Section 8.9 shall have been timely given. "Person" means an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, governmental authority, or other juridical entity of whatever nature. "Plan" means any employee benefit or other plan established, maintained, or to which contributions have been made by the Borrower or any ERISA Affiliate. "Primary Equity Capital" of an entity means the aggregate of the allowance for loan and lease losses of such entity, as reported in the most recent quarterly report on Form 10-Q or annual report on Form 10-K filed by the Borrower with the SEC plus the Equity Capital of such entity. "Prohibited Transaction" means any transaction prohibited by Section 406 of ERISA or Section 4975 of the Internal Revenue Code, as amended from time to time. "Reportable Event" means any of the events set forth in Section 4043 of ERISA. "Required Lenders" means Lenders (including, where relevant, Additional Lenders) having an aggregate Percentage of 66 2/3% or more or, if the Commitments shall have been terminated, having 66 2/3% or more of the aggregate principal amount of all then outstanding Advances. "Return on Assets" of a Person means the percentage determined by dividing the Net Income of such Person for the four calendar quarters immediately preceding the date of determination by its total average assets during such period. The total average assets of a Person shall be as reported in quarterly financial statements for such period or, in the case of a Bank Subsidiary, in its four most recent quarterly call reports. "Revolving Credit Commitment" means Lenders' commitments to provide revolving loans as provided in Section 2.1.1. "Revolving Credit Commitment Amount" means, with respect to each Lender, the Revolving Credit Commitment amount set forth opposite that Lender's name on Exhibit B, as that amount may be adjusted from time to time pursuant to Section 5.3 or any assignment made pursuant to Section 12.11. "Revolving Credit Termination Date" means August August 10, 2006. "Revolving Loans" shall have the meaning provided in Section 2.1.1. "Revolving Note" means a Note evidencing a Revolving Loan made by a Lender, which Note is in the form of Exhibit E attached hereto. "San Francisco Company" means The San Francisco Company, a Delaware corporation. "San Francisco Company Guaranty" means the Guaranty, in the form of Exhibit F, whereby San Francisco Company guarantees to the Lenders payment of the Obligations. "San Francisco Company Security Agreement" means the San Francisco Company Security Agreement, in the form of Exhibit G, pledging to the Agent for the ratable benefit of the Lenders all of the stock of First Bank. "SEC" means the federal Securities and Exchange Commission. "Second Term Loan Funding Date" means November 11, 2005. "Subordinated Debt" means indebtedness of the Borrower or any of its Subsidiaries which is subordinated in right of payment to all indebtedness of the Borrower to any Lender, on terms that have been approved in writing by the Required Lenders and that have been noted by appropriate legend on all instruments evidencing the Subordinated Debt. "Subsidiary" means, as to Borrower, any business entity, including, but not limited to any corporation, limited liability company, partnership, limited partnership, limited liability partnership, business trust, or any similar entity, with total assets exceeding $1,000,000 of which shares of stock having ordinary voting power (other than stock having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation are at the time owned, or the management of which corporation is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by the Borrower or a Subsidiary of Borrower. "Term Loan" shall have the meaning provided in Section 2.1.2. "Term Loan Commitment" means Lenders' commitment to provide term loans as provided in Section 2.1.2. "Term Loan Commitment Amount" means, with respect to each Lender, the Term Loan Commitment amount set opposite that Lender's name on Exhibit B, as that amount may be adjusted from time to time pursuant to any assignment made pursuant to Section 12.11. "Term Note" means a promissory note evidencing a Term Loan made by a Lender and in the form of Exhibit H. "Tier I Risk Based Capital Ratio" shall be defined and calculated in accordance with Federal Reserve Board Regulation Y in the case of the Borrower and in accordance with Section 38 of the Federal Deposit Insurance Act in the case of a Bank Subsidiary. "Total Revolving Loan Commitment Amount" means the sum of Fifteen Million Dollars ($15,000,000) as that amount may be adjusted from time to time pursuant to Section 5.3. "Total Risk Based Capital Ratio" shall be defined and calculated in accordance with Federal Reserve Board Regulation Y in the case of the Borrower and in accordance with Section 38 of the Federal Deposit Insurance Act in the case of a Bank Subsidiary. "Total Term Loan Commitment Amount" means the sum of One Hundred Million Dollars ($100,000,000). Section 1.2 Other Interpretive Provisions. ----------------------------- (a) All accounting terms not specifically defined herein shall be construed in accordance with GAAP consistent with those applied in the preparation of the financial statements and reports referred to in Section 8.1, and all financial data submitted pursuant to this Agreement shall be prepared in accordance with such principles. (b) Section references are to this Agreement unless otherwise specified. (c) Schedules and Exhibits referred to herein are attached to and made a part hereof unless otherwise specified. (d) The term "including" is not limiting and means "including without limitation." (e) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." (f) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement and the other Loan Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, supplements and other modifications thereto, but only to the extent such amendments, restatements, supplements and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation. (g) This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and each shall be performed in accordance with its terms. (h) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Borrower, Lenders and Agent and the other parties thereto and are the products of all parties. Accordingly, they shall not be construed against Borrower, Agent or Lenders merely because of Borrower's, Agent's or Lender's involvement in their preparation. ARTICLE II. COMMITMENTS OF THE LENDERS; BORROWING, CONVERSION AND LETTER OF CREDIT PROCEDURES Section 2.1 Commitments. On and subject to the terms and ----------- conditions of this Agreement, each of the Lenders, severally and for itself alone, agrees to make loans to, and to issue or participate in letters of credit for the account of, the Borrower as follows: 2.1.1. Revolving Credit Commitment. Subject to Section 2.2, each --------------------------- Lender shall make a loan to Borrower, on a revolving basis (collectively, the "Revolving Loans"), from time to time through the Revolving Credit Termination Date, to the extent of such Lender's Percentage of the aggregate amount requested by Borrower from all Lenders in accordance with this Agreement; provided however that the aggregate of all Revolving Loans outstanding shall at no time exceed the Total Revolving Loan Commitment Amount. 2.1.2. Term Loan Commitment. Each Lender shall make a loan to -------------------- Borrower on the Closing Date, equal to such Lender's Percentage of the sum of Eighty Million Dollars ($80,000,000). Thereafter, each Lender shall make a loan to Borrower on the Second Term Loan Funding Date, equal to such Lender's Percentage of the sum of Twenty Million Dollars ($20,000,000), which each Lender shall remit to the Borrower in accordance with Section 2.4 (the "Second Term Loan"). Each Lender's loan to the Borrower on the Closing Date and the Second Term Loan Funding Date shall comprise each Lender's "Term Loan" to the Borrower. The Term Loans in the aggregate shall equal the Total Term Loan Commitment Amount. The commitments of Lenders to make Term Loans hereunder shall expire with making of the Term Loan on the Closing Date and the Second Term Loan on the Second Term Loan Funding Date, as applicable. 2.1.3. Letter of Credit Commitment. Subject to Section 2.3, ------------------------------ Agent shall, from time to time, issue one or more letters of credit (each a "Letter of Credit"), for the account of Borrower, through the Letter of Credit Termination Date, in an aggregate amount at any time outstanding not to exceed the Letter of Credit Commitment Amount. Each Letter of Credit shall be at the request and for the account of Borrower pursuant to a separate L/C Application entered into by Borrower, as applicant. The terms and conditions set forth in each L/C Application shall supplement the terms and conditions hereof, but, in the event of any inconsistency between the terms and conditions of any such L/C Application, and the terms of the Agreement, the terms hereof shall control. Each Lender shall be deemed to purchase and hold a participation in each Letter of Credit equal to such Lender's Percentage of the face amount of that Letter of Credit. Notwithstanding anything to the contrary above provided, at no time shall the aggregate face amount of all Letters of Credit outstanding exceed the Letter of Credit Commitment Amount. Section 2.2 Revolving Loan Procedures. ------------------------- 2.2.1 Borrowing Procedures. -------------------- (a) Each Revolving Loan shall occur following written request via such form as attached as Exhibit I or telephonic request to the Agent from the Borrower, with any telephonic request to be confirmed by fax in such form as attached as Exhibit I. Each such notice or request shall specify: (i) the date of the requested Revolving Loan; (ii) the amount thereof; and (iii) if any portion of such Revolving Loan will bear interest at a Eurodollar Rate, the Interest Period selected by the Borrower with respect thereto. Such notice or request must be received by the Agent not later than 10:00 a.m. (California time) on the Bank Business Day prior to the day on which such Revolving Loan is to occur or, if all or any portion of the Revolving Loan will bear interest at a Eurodollar Rate, not later than three Eurodollar Business Days prior to the date on which such Revolving Loan is to occur. Each Borrowing shall be in the amount of (i) not less than $1,000,000 or (ii) in an integral multiple of $100,000 greater than $1,000,000. The Borrower shall be obligated to repay all Revolving Loans made to it notwithstanding the fact that the Person requesting the same was not in fact authorized so to do. Any request for a Revolving Loan shall be deemed to be a representation that the statements set forth in Article VII are correct except to the extent that the same relate specifically to an earlier date. (b) Upon receiving a request for a Borrowing under this Section 2.2.1, and in any event not later than 11:00 a.m. (California time) on the day that the request is received, the Agent will notify the Lenders of the amount of the requested Borrowing, the amount of each Lender's Revolving Loan with respect thereto, and, if applicable, the fact that the Borrower has elected a Eurodollar Rate and the Interest Period selected by the Borrower. Upon fulfillment of the applicable conditions set forth in Article VI, each Lender shall remit its Percentage of the requested Revolving Loan to the Agent in immediately available funds. Each Lender shall make each Advance to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 11:00 a.m. (California time) to the account of the Agent most recently designated by it for such purpose by notice to the Lenders. The Agent will make such Advances available to the Borrower by wire transferring the same to an account designated by the Borrower at First Bank or in such other manner as the Agent and the Borrower may from time to time agree in writing, prior to 12:00 noon (California time) on the day of the requested Revolving Loan. The Agent shall have no obligation to disburse the requested Borrowing if any condition set forth in Article VI has not been satisfied on the day of the requested Revolving Loan. Unless the Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Agent such Lender's Percentage of such Revolving Loan, the Agent may assume that such Lender has made such share available on such date in accordance with this Section 2.2.1 and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its Percentage of the applicable Revolving Loan available to the Agent, then the applicable Lender agrees to pay to the Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Agent, at the greater of the Federal Funds Rate and a rate determined by the Agent in accordance with banking industry rules on interbank compensation. If such Lender pays such amount to the Agent, then such amount shall constitute such Lender's Percentage in such Revolving Loan. (c) In the event that any one or more Lenders' obligations to make Advances at the Eurodollar Rate are suspended pursuant to Section 2.2.2(c) following a request for a Borrowing that specifies that a Eurodollar Rate is to apply, such Lenders shall nevertheless be obliged to fund their respective Advances, and such Advances shall bear interest at the Floating Rate until they are repaid or until such Lenders may again make, maintain or fund Advances at the Eurodollar Rate and the Borrower requests pursuant to Section 2.2.2(a) that a Eurodollar Rate be applicable to such Advances. 2.2.2 Conversion of Principal to Eurodollar Rates. ------------------------------------------- (a) At the election of the Borrower, which election may be exercised from time to time, the Borrower may request in writing via such form as attached as Exhibit J or by telephonic request to be confirmed by fax in such form as attached as Exhibit J that a Eurodollar Rate be applicable for the portion of the outstanding principal balance of the Term or Revolving Notes (including any Revolving Loan requested or to be requested) and for the Interest Period indicated by the Borrower in its request. The portion of the outstanding balance of the Notes for which a Eurodollar Rate is requested must, on the first day of the applicable Interest Period, either (A) bear interest at the applicable Floating Rate, or (B) bear interest at an applicable Eurodollar Rate with respect to which the Interest Period expires on such first day. A request for a Eurodollar Rate must be received by the Agent before 10:00 a.m. (California time) on the day three (3) Eurodollar Business Days before the first day of the proposed Interest Period. Upon receiving a request for a Eurodollar Rate, and in any event not later than the close of business on the day that the request is received, the Agent will notify the Lenders of the Note (Term or Revolving) subject to such Eurodollar Rate and the amount and Interest Period applicable thereto. Not later than 2:00 p.m. (California time) on the second (2nd) Eurodollar Business Day prior to the date on which such Eurodollar Rate is to become effective, the Agent will notify the Lenders and the Borrower of the interest rate to be applicable thereto. Following a request for a Eurodollar Rate under this Section 2.2.2, or pursuant to Section 2.2.1, the Eurodollar Rate as determined hereunder shall be the interest rate applicable for the proposed Interest Period to the portion of the outstanding principal balance of the Notes to which the quotation related, subject to fluctuations in the applicable Margin (and the remaining part of the principal balance of those Notes (and any other Notes), if any, shall continue to bear interest at the rate or rates previously applicable to such amounts). At the termination of such Interest Period, the interest rate applicable to that portion of the principal balance of those Notes to which the Eurodollar Rate quotation was applicable shall revert to the Floating Rate unless a new Eurodollar Rate quotation with respect thereto is requested by the Borrower in accordance with this Section 2.2.2. (b) The Eurodollar Rate applicable to each Eurodollar Rate Funding shall be determined by the Agent between the opening of business and 9:00 a.m. (California time) on the second (2nd) Eurodollar Business Day prior to the beginning of the applicable Interest Period. Promptly following such determination, the Agent shall give notice thereof (which may be by telephone if promptly confirmed by fax) to the Borrower and each Lender. Each such determination of the applicable Eurodollar Rate shall be conclusive and binding upon the parties hereto, in the absence of demonstrable error. The Agent, upon written request of the Borrower or any Lender, shall deliver to the Borrower or such requesting Lender a statement showing the computations used by the Agent in determining the applicable Eurodollar Rate hereunder. (c) In no event shall more than six (6) Eurodollar Rate Fundings be outstanding at any one time. In no event may the Borrower request a Eurodollar Rate Funding if, after giving effect to such Eurodollar Rate Funding, the Borrower would be required to prepay the Eurodollar Rate Funding in order to pay the principal amount of the related Revolving or Term Loans on the (as applicable) Revolving Credit or Term Loan Termination Date. In no event may the Borrower rescind any request for a Eurodollar Rate Funding once made. Notwithstanding anything to the contrary in this Agreement, the Agent and the Lenders shall have no obligation to honor any request for a Eurodollar Rate Funding if a Default or Event of Default has occurred and is continuing when such request is made or on the first (1st) day of the Interest Period applicable thereto. If on or prior to the first day of any Interest Period the Agent reasonably determines (which determination shall be conclusive) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or the Required Lenders both reasonably determine (which determination shall be conclusive) and notify the Agent that the Eurodollar Rate will not adequately and fairly reflect the cost to the Lenders of funding the requested Eurodollar Rate Funding for such Interest Period, then the Agent shall give the Borrower prompt notice thereof specifying the amounts or periods and, so long as such condition remains in effect, the Lenders shall be under no obligation to fund any Eurodollar Rate Fundings and the Borrower shall, on the last day(s) of the then current Interest Period(s) for the outstanding Eurodollar Rate Fundings, either prepay such Eurodollar Rate Fundings or convert such Eurodollar Rate Fundings into Floating Rate Borrowings in accordance with the terms of this Agreement. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender to make, maintain, or fund Advances at the Eurodollar Rate hereunder, then such Lender shall promptly notify the Borrower thereof and such Lender's obligation to make, maintain or fund Advances at the Eurodollar Rate shall be suspended until such time as such Lender may again make, maintain, and fund Advances at the Eurodollar Rate. If the obligation of any Lender to make, maintain or fund Advances at the Eurodollar Rate shall be suspended pursuant to this Section 2.2.2(c), such Lender's affected Advances shall be automatically converted into Floating Rate Advances on the last day(s) of the then current Interest Period(s) for the affected Advances. (d) Absent error, the records of the Agent shall be conclusive evidence as to the amount of each Eurodollar Rate Funding and the interest rate and Interest Period applicable thereto. Section 2.3 Letters of Credit Procedures. ---------------------------- 2.3.1 Issuance/Lender Participation. ----------------------------- (a) Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered into by the Borrower, as applicant, completed in a manner satisfactory to the Agent, and delivered to the Agent at least five(5) Bank Business Days prior to the date such Letter of Credit is to be issued. The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but in the event of inconsistency between the terms of any such L/C Application and the terms hereof, the terms hereof shall control. (b) Each Lender shall be deemed to hold a participation interest in each Letter of Credit equal to that Lender's Percentage of the face amount of that Letter of Credit. If the Agent makes any payment pursuant to the terms of any Letter of Credit and is not promptly reimbursed, the Agent may request that each Lender pay such Lender's Percentage of the unreimbursed amount. Upon receipt of any such request prior to 11:00 a.m. (California time) on a Bank Business Day, the recipient shall be unconditionally and irrevocably obligated to pay its Percentage of the unreimbursed amount to the Agent in immediately available funds prior to 1:00 p.m. (California time) on such date. Notices received after 11:00 a.m. (California time) shall be deemed to have been received on the following Bank Business Day. If full payment is not made by a Lender when due hereunder, then the applicable Lender agrees to pay to the Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Agent, at the greater of the Federal Funds Rate and a rate determined by the Agent in accordance with banking industry rules on interbank compensation. If such Lender pays such amount to the Agent, then such amount shall constitute such Lender's Percentage in such Letter of Credit. After making any payment to the Agent under this subsection in connection with a particular Letter of Credit, a Lender shall be entitled to participate to the extent of its Percentage in the related reimbursements and any interest thereon received by the Agent from the Borrower or otherwise. Upon receiving any such reimbursement, the Agent will distribute to each Lender its Percentage of such reimbursement and any interest thereon. (c) No Letter of Credit shall be issued with an expiry date later than ninety (90) days after the Letter of Credit Termination Date. (d) Any request for the issuance of a Letter of Credit under this Section 2.3 shall be deemed to be a representation that the statements set forth in Article VII hereof are correct except to the extent that the same relate specifically to an earlier date. 2.3.2 Payment of Amounts Drawn Under Letters of Credit. The ---------------------------------------------------- Borrower shall pay the Agent any and all amounts required to be paid under the applicable L/C Application, when and as required to be paid thereby, including all amounts designated below, when and as designated: (a) The Borrower shall pay the Agent on the day a draft is honored under any Letter of Credit a sum equal to all amounts drawn under such Letter of Credit plus any and all reasonable charges and expenses that the Agent may pay or incur relative to such draw, plus interest on all such amounts, charges and expenses as set forth below (all such amounts are hereinafter referred to, collectively, as the "Obligation of Reimbursement"). (b) The Borrower shall pay the Agent on demand interest on all amounts, charges and expenses payable by the Borrower to the Agent under this Section 2.3.2, accrued from the date any such draft is paid, or any such charge or expense is paid or incurred, by the Agent until payment in full by the Borrower at the Floating Rate. (c) Upon the occurrence of any Default or Event of Default, and so long as any such Default or Event of Default continues without written waiver thereof by the Required Lenders, the rate of interest on all amounts, charges and expenses payable by the Borrower to the Agent under this Section 2.3.2 shall be the Floating Rate plus four percent (4.00%). 2.3.3 Special Account. --------------- (a) If the Commitments are terminated in whole pursuant to Section 5.4, or if an Event of Default shall occur and be continuing, and in any event on the Letter of Credit Termination Date, the Borrower shall pay the Agent in immediately available funds, for deposit in a deposit account established for the sole purpose of holding such funds, an amount equal to the maximum aggregate amount available to be drawn under all Letters of Credit then outstanding, assuming compliance with all conditions for drawing thereunder (the "Maximum Reimbursement Obligation"). Alternatively, the Borrower may transfer to the Agent cash and Permissible Securities for deposit in a securities account established for the sole purpose of holding such funds, of an aggregate Collateral Value equal to the Maximum Reimbursement Obligation; provided, however, that if the Borrower wishes to -------- ------- transfer Permissible Securities in lieu of cash, it must simultaneously deliver to the Agent such account and control agreements and such other documents as the Agent may reasonably determine are necessary in order to establish and perfect the security interest referred to in subsection (c), below. Any such deposit account or securities account shall be referred to herein as the "Special Account." (b) "Permissible Securities" means securities described in Exhibit K, and the "Collateral Value" of a Permissible Security is its market value, as reasonably determined by the Agent, multiplied by the percentage determined pursuant to Exhibit K. The "Collateral Value" of cash is its face value. (c) The Borrower hereby grants to the Agent, for the benefit of the Lenders, a security interest in the Special Account and all funds and Permissible Securities held therein from time to time and all proceeds thereof, as security for the payment of all Obligations. Any interest earned on funds and Permissible Securities deposited in the Special Account shall be credited to the Special Account. Amounts on deposit in the Special Account may be applied by the Agent at any time or from time to time to the Borrower's Obligation of Reimbursement or any other Obligations, in the Agent's sole discretion, and shall not be subject to withdrawal by the Borrower so long as the Agent maintains a security interest therein. The Agent agrees to transfer any balance of cash or Permissible Securities in the Special Account to the Borrower at such time as the Obligations have been paid in full. 2.3.4 Authorization for Borrowing. In the event that the --------------------------- Borrower shall be obligated to make any payment pursuant to Section 2.3.2 or any payment or transfer of securities pursuant to Section 2.3.3, and shall not have made other arrangements for payment or transfer of securities as of the due date, then the Agent will initiate an Advance in an amount not to exceed the amount available to be borrowed pursuant to Section 2.1.1 without request from the Borrower and use the proceeds to satisfy such payment obligation. The procedure for such Borrowing, and the Agent's and Lenders' rights and Obligations with respect thereto, shall be in all respects identical to those applicable to an Advance initiated by the Borrower pursuant to Section 2.1.1, and such Advance shall not itself cause a Default or Event of Default. The Borrowing in respect of such Advance shall bear interest at the Floating Rate. Section 2.4 Second Term Loan Procedures. Funding of the Second ---------------------------- Term Loan shall occur following written request via such form as attached as Exhibit I or telephonic request to the Agent from the Borrower, with any telephonic request to be confirmed by fax in such form as attached as Exhibit I. Such notice or request shall specify, if any portion of such Second Term Loan will bear interest at a Eurodollar Rate, the Interest Period selected by the Borrower with respect thereto. Such notice or request must be received by the Agent not later than 10:00 a.m. (California time) on the Bank Business Day prior to the Second Term Loan Funding Date or, if all or any portion of the Second Term Loan will bear interest at a Eurodollar Rate, not later than three Eurodollar Business Days prior to the Second Term Loan Funding Date. Upon fulfillment of the foregoing and the applicable conditions set forth in Article VI, each Lender shall remit its Percentage of the Second Term Loan to the Agent in immediately available funds not later than 11:00 a.m. (California time) on the Second Term Loan Funding Date by wire transfer to the account of the Agent most recently designated by it for such purpose by notice to the Lenders. The Agent will make such Second Term Loan available to the Borrower by wire transferring the same to an account designated by the Borrower at First Bank or in such other manner as the Agent and the Borrower may from time to time agree in writing, prior to 12:00 noon (California time) on the Second Term Loan Funding Date. The Agent shall have no obligation to disburse the Second Term Loan if any condition set forth in Article VI has not been satisfied on the Second Term Loan Funding Date. Unless the Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Agent such Lender's Percentage of the Second Term Loan, the Agent may assume that such Lender has made such share available on such date in accordance with this Section 2.4 and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If a Lender has not in fact made its Percentage of the applicable Second Term Loan available to the Agent, then the applicable Lender agrees to pay to the Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Agent, at the greater of the Federal Funds Rate and a rate determined by the Agent in accordance with banking industry rules on interbank compensation. If such Lender pays such amount to the Agent, then such amount shall constitute such Lender's Percentage in such Second Term Loan. Section 2.5 Use of Proceeds. The proceeds of the Advances shall be --------------- used by the Borrower (i) to refinance existing indebtedness under the Existing Credit Agreement; (ii) for its general corporate purposes, including redemption of subordinated debt in connection with redemption of trust preferred securities guaranteed by Borrower; and (iii) for Permitted Acquisitions. ARTICLE III. EVIDENCING OF LOANS Section 3.1 Notes. The Revolving Loans made by each Lender shall ----- be evidenced by and repayable in accordance with a single promissory note of Borrower payable to the order of such Lender substantially in the form of a Revolving Note. The Term Loan made by each Lender shall be evidenced by and repayable in accordance with a single promissory note of Borrower payable to the order of such Lender substantially in the form of a Term Note. Section 3.2 Payment of Term Note. The entire original principal --------------------- balance of the Term Loan (including, after the same is advanced, the Second Term Loan) made by each Lender shall be repaid in ten (10) equal calendar quarterly installments, each equal to five percent (5%) of such original principal balance, and a final payment, equal to the entire remaining principal balance (and all accrued and unpaid interest and other sums due under this Agreement), due on the Maturity Date, which is the absolute and final due date of the Term Loan. The first such quarterly installment shall be due on March 31, 2006, and on the last day of each calendar quarter thereafter, until the Maturity Date. Section 3.3 Recordkeeping. The Agent shall record in its records ------------- the date and amount of each Advance made by each Lender, shall record in its records the date and amount of each such Advance, each repayment or conversion thereof and, the case of each Borrowing that will bear interest (or is converted to bear interest) at a Eurodollar Rate, the dates on which each Interest Period for Borrowing shall begin and end. The aggregate unpaid principal amount so recorded shall be rebuttably presumptive evidence of the principal amount of the Borrowings owing and unpaid. The failure to so record any such amount, or any error in so recording any such amount, shall not limit or otherwise affect the Obligations of Borrower hereunder or under any Note to pay the principal amount of all Borrowings hereunder, together with all interest accruing thereon. ARTICLE IV. INTEREST Section 4.1 Interest Rates. Subject to Section 4.7, Borrower shall -------------- pay interest on the unpaid principal balance of each Borrowing, for the period commencing on the date of such Borrowing until such Borrowing is repaid in full, as follows: (a) for each Revolving or Term Loan at all times and to the extent the Eurodollar Rate is not applicable to such Revolving or Term Loan, the Floating Rate. (b) for each Revolving or Term Loan to which the Eurodollar Rate is applicable, the Eurodollar Rate; provided however that, in determining such Eurodollar Rate, the applicable Margin shall be 87.5 basis points for each Revolving Loan and 100 basis points for each Term Loan. Section 4.2 Default Interest Rate. Upon the occurrence of any ---------------------- Default or Event of Default, and so long as such Default or Event of Default continues without written waiver thereof by the Required Lenders, each Note shall bear interest at an annual rate that shall be four percent (4.00%) plus the annual rate at which interest would otherwise accrue on that Note. Accrual of interest at such increased rate shall not be deemed a waiver or excuse of any such Default or Event of Default. Section 4.3 Interest Payments. ----------------- (a) Interest. Interest accruing on the principal balance of the Notes shall be due and payable as follows: (i) Interest accruing on the outstanding principal balance of the Notes at the Floating Rate each calendar quarter shall be due and payable on the last day of that calendar quarter, with the first quarterly payment of interest due on the last day of September, 2005; and the last payment of interest shall be due on the Revolving Credit Termination Date with respect to Revolving Notes and on the Maturity Date with respect to Term Notes. (ii) Interest on each Eurodollar Rate Funding shall be due and payable on the last day of the applicable Interest Period or, if such Interest Period is six months, on the last day of the third month during such Interest Period, and on the last day of such Interest Period. (b) Principal. The principal balance of the Revolving Notes shall be due and payable in full on the Revolving Credit Termination Date. The principal balance of the Term Note shall be due and payable on the Maturity Date. Section 4.4 Making of Payments. All payments of principal and ------------------ interest under the Notes and of all fees hereunder shall be made to the Agent in immediately available funds. Payments received after 11:00 a.m. (California time) on any day shall be deemed received on the next succeeding Bank Business Day. The Borrower and the Lenders agree that the amount shown on the books and records of the Agent as being the principal balance of each Lender's Note shall be prima facie evidence of such principal amount. Upon Agent's receipt of written request by Borrower, the Borrower authorizes the Agent to charge against any account the Borrower may maintain with Wells Fargo Bank, National Association, an amount equal to the accrued interest and fees from time to time due and payable to the Agent under the Notes or hereunder, or (at the option of the Required Lenders) to make an Advance in such amount. Section 4.5 Payment on Nonbusiness Days. Payments of interest on ---------------------------- Eurodollar Fundings shall be governed by Section 4.3(a)(ii). With respect to all other payments to be made hereunder or under the Notes, whenever such payments shall be stated to be due on a day other than a Bank Business Day, such payment may be made on the next succeeding Bank Business Day, and such extension of time shall in each case be included in the computation of payment of interest on such Note or the fees hereunder, as the case may be. Section 4.6 Computation of Interest and Fees. All interest under --------------------------------- all Notes, and all fees under this Agreement, shall be computed on the basis of actual number of days elapsed in a year of 360 days. Section 4.7 Generally. The Revolving Loan Margin, the Term Loan --------- Margin and the L/C Margin, through and including the first adjustment occurring as specified below, shall be 0.875%, 1.00% and 1.00%, respectively. Beginning with the receipt by the Lenders of the financial statements and Compliance Certificate for the period ending September 30, 2005, each Margin and the L/C Margin shall be adjusted each quarter on the basis of the Funded Debt Ratio as at the end of the previous fiscal quarter, in accordance with the following table:
Funded Revolving Loan Margin Term Loan Margin L/C Margin Debt Ratio (in Basis Points) (in Basis points) (in Basis Points) - ---------- ----------------- ----------------- ----------------- 1.75 to 1.00 or more 112.5 125.0 125.0 1.00 to 1.00 or more, but 100.0 112.5 112.5 less than 1.75 to 1.00 Less than 1.00 to 1.00 87.5 100.0 100.0
Reductions and increases in the Margins will be made quarterly on the first day of the month following the date the Borrower's financial statements and Compliance Certificate required under Section 8.1 are due. Notwithstanding the foregoing, (i) if the Borrower fails to deliver any financial statements or Compliance Certificates when required under Section 8.1, the Agent may (and, upon request of the Required Lenders, shall), by notice to the Borrower, increase the Margins to the highest rates set forth above until such time as the Agent has received all such financial statements and Compliance Certificates, and (ii) no reduction in any of the Margins will be made if a Default or an Event of Default has occurred and is continuing at the time that such reduction would otherwise be made. ARTICLE V. FEES, REDUCTIONS AND PREPAYMENTS Section 5.1 Term and Revolving Loan Commitment Fee. The Borrower ------------------------------------------ shall pay to the Agent, for the benefit of the Lenders, a commitment fee at an annual rate equal to 20.0 basis points (0.20%) applied to the aggregate daily average unused amount of both the Revolving Credit Commitment Amounts and, until funded, the Second Term Loan. This commitment fee shall be due and payable quarterly in arrears, with the first payment due September 30, 2005 for the period from the Closing Date through September 30, 2005, and payments due quarterly thereafter. Any such commitment fee remaining unpaid on the Revolving Credit Termination Date shall be due and payable on that date. Section 5.2 Letter of Credit Fees. The Borrower shall pay fees as --------------------- follows: (a) Letter of Credit Fees. The Borrower shall pay the Agent for the benefit of the Lenders a fee with respect to each Letter of Credit, if any, accruing on a daily basis and computed at an annual rate equal to the L/C Margin of the aggregate amount that may then be drawn on all issued and outstanding Letters of Credit from and including the date of issuance of each such Letter of Credit until such date as each such Letter of Credit shall terminate by its terms or be fully drawn, due and payable quarterly in arrears on the last day of each calendar quarter, commencing September 30, 2005, and on the date when the last Letter of Credit expires or is fully drawn. The foregoing fee shall be in addition to any and all fees, commissions and charges of the Agent with respect to or in connection with any such Letter of Credit. Upon the occurrence of any Default or Event of Default, and so long as such Default or Event of Default continues without written waiver thereof by the Required Lenders, the annual rate at which such fee accrues shall be four percent (4.00%) plus the L/C Margin. Accrual of such fee at such increased rate shall not be deemed a waiver or excuse of any such Default or Event of Default. (b) Letter of Credit Administrative Fees. The Borrower shall pay the Agent, on demand, the administrative fees charged by the Agent in connection with issuing Letters of Credit, honoring drafts under Letters of Credit, amendments thereto, transfers thereof and all other activity with respect to Letters of Credit at the then-current rates published by the Agent for such services rendered on behalf of customers of the Agent generally and provided to the Borrower. (c) Letter of Credit Commitment Fee. The Borrowers shall pay to Agent, for the benefit of Lenders, a commitment fee at an annual rate equal to 20.0 basis points (.200%) applied to the aggregate daily average unused amount of the Letter of Credit Commitment Amount. The commitment fee shall be due and payable quarterly in arrears with the first quarterly payment due September 30, 2005. Any such commitment fee remaining unpaid on the Revolving Credit Termination Date shall be due and payable on that date. Section 5.3 Termination or Reduction of the Revolving Credit ------------------------------------------------------- Commitments. The Borrower may at any time and from time to time upon ten (10) - ----------- calendar days' prior notice to the Agent permanently terminate the entire Revolving Credit Commitment or permanently reduce such Commitment in part, without penalty or premium, provided that (i) such Commitments may not be terminated while any Advances remain outstanding, (ii) each partial reduction shall be in the amount of $1,000,000 or a multiple thereof, (iii) any partial reduction of such Commitments shall be pro rata as to each Lender in accordance with that Lender's Percentage, and (iv) no reduction shall reduce such Commitments to an amount less than the aggregate amount of the Advances outstanding at the time. Section 5.4 Termination or Reduction of Letter of Credit ------------------------------------------------------- Commitment. The Borrower may at any time and from time to time upon ten (10) - ---------- calendar days' prior notice to Agent, permanently terminate the Letter of Credit Commitment in whole or permanently reduce the Letter of Credit Commitment in part, without penalty or premium, provided that (i) the Letter of Credit Commitment shall in all events be terminated in full if the Total Revolving Loan Commitment Amount is terminated in full pursuant to Section 5.3, (ii) each partial reduction shall be in the amount of $1,000,000.00 or a multiple thereof, and (iii) no reduction shall reduce the Letter of Credit Commitment to an amount less than the aggregate amount of all outstanding Letters of Credit at that time. Section 5.5 Voluntary Prepayments. The Borrower may prepay all or a --------------------- portion of the principal balance of the Revolving and/or Term Notes bearing interest at a Floating Rate (the "Floating Rate Portion") in whole or in part, at any time and from time to time; provided that (i) prepayment of any Lender's such Note must be accompanied by pro rata prepayment of each other Lender's such Note, (ii) any prepayment of the full amount of any such Note shall include accrued interest thereon, and (iii) each partial prepayment of the Floating Rate Portion of such Notes shall be in the principal amount of $1,000,000 or an integral multiple of $100,000 greater than $1,000,000. The Borrower may prepay the portion of the principal balance of the Revolving and/or Term Notes bearing interest at a Eurodollar Rate (the "Eurodollar Rate Portion") in whole or in part, at any time from time to time; provided that (i) prepayment of any Lender's such Note must be accompanied by pro rata prepayment of each other Lender's such Note, (ii) any prepayment of the full amount of any such Note shall include accrued interest thereon, (iii) each partial prepayment of the Eurodollar Rate Portion of the Notes shall be in the principal amount of $1,000,000 or an integral multiple of $100,000 greater than $1,000,000, (iv) any prepayment of the Eurodollar Rate Portion of such Notes shall be made only upon three Bank Business Days' notice to the Agent, and (v) if the prepayment is made on a date other than the last day of the applicable Interest Period, such prepayment must be accompanied by a written agreement from Borrower to reimburse the Lenders for any amounts due to the Lenders pursuant to Section 5.6(b). Section 5.6 Fees on Advances and Indemnity. The Borrower shall pay ------------------------------ the following (in addition to any interest payable on Advances and any fees or other amounts payable hereunder): (a) If at any time the enactment of any new generally applicable law, rule or regulation or the issuance of a generally applicable interpretation or administration thereof by any governmental authority (including, without limitation, Regulation D of the Federal Reserve Board): (i) shall subject any Lender to any tax, duty or other charges (including but not limited to any tax designed to discourage the purchase or acquisition of foreign securities or debt instruments by United States nationals) with respect to this Agreement, or shall materially change the basis of taxation of payments to any Lender of the principal of or interest on any portion of the principal balance of the Notes bearing interest at a Eurodollar Rate (except for the imposition of or changes in respect of the rate of tax on the overall net income of that Lender); or (ii )shall impose or deem applicable or increase any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by any Lender because of any portion of the principal balance of any Note bearing interest at a Eurodollar Rate; and the result of any of the foregoing would be to increase the cost to that Lender of making or maintaining any such portion or to reduce any sum received or receivable by that Lender with respect to such portion, then, within 30 days after demand by any Lender specifying the basis of the Lender's assertion in reasonable detail, the Borrower shall pay that Lender such additional amount or amounts as will compensate that Lender for such increased cost or reduction; provided, -------- however, that no amount shall be payable by Borrower if the reason ------- for the additional charges, reserves, special deposit or similar requirements against a particular Lender arises from a change in the status of the Lender, rather than from the imposition of such requirements against commercial lending institutions generally. (b) The Borrower shall also compensate any Lender, upon written request by that Lender (which request shall set forth the basis for requesting such amounts), for all losses and expenses in respect of any interest or other consideration paid by that Lender to lenders of funds borrowed by it or deposited with it to maintain any portion of the principal balance of any Note at a Eurodollar Rate which that Lender may sustain to the extent not otherwise compensated for hereunder and not mitigated by the reemployment of such funds to the extent such loss or expense arises (i) as a consequence of any failure by the Borrower to make any payment when due of any amount due hereunder in connection with any Eurodollar Rate Fundings, (ii) due to any failure of the Borrower to borrow or convert any Eurodollar Rate Fundings on a date specified therefor in a notice thereof, or (iii) due to any payment or prepayment of any Eurodollar Rate Funding on a date other than the last day of the applicable Interest Period for such Eurodollar Rate Funding. A certificate as to any such loss or expense (including calculations, in reasonable detail, showing how that Lender computed such loss or expense) shall be promptly submitted by that Lender to the Borrower. Such loss or expense may be computed as though that Lender acquired deposits in the London interbank market to fund that portion of the principal balance whether or not that Lender actually did so. (c) A notice from any Lender under this Section 5.6 claiming compensation and setting forth the additional amount or to be paid to it hereunder shall be conclusive in the absence of error. In determining any such amount, a Lender may use any reasonable averaging and attribution methods. Section 5.7 Capital Adequacy. In addition to any interest on ---------------- Advances, if any Lender determines at any time that its Return has been reduced as a result of any Capital Adequacy Rule Change, that Lender may require that the Borrower pay it the amount necessary to restore its Return to what it would have been had there been no Capital Adequacy Rule Change. For purposes of this Section: (a) "Return," for any period, means the percentage determined by dividing (i) the sum of interest and ongoing fees earned by a Lender under this Agreement during such period, by (ii) the average capital that Lender is required to maintain during such period as a result of its being a party to this Agreement, as reasonably determined in good faith by that Lender based upon its total capital requirements pursuant to the Capital Adequacy Rules then in effect. Return may be calculated for each calendar quarter and for the shorter period between the end of a calendar quarter and the date of termination in whole of this Agreement. (b) "Capital Adequacy Rule" means any law, rule, regulation or guideline regarding capital adequacy that applies to any Lender, or the interpretation thereof by any governmental or regulatory authority with supervisory authority over such Lender. Capital Adequacy Rules include rules requiring financial institutions to maintain total capital in amounts based upon percentages of outstanding loans, binding loan commitments and letters of credit. (c) "Capital Adequacy Rule Change" means any change applicable to banks generally in any Capital Adequacy Rule occurring after the date of this Agreement, but the term does not include any changes in applicable requirements that at the date hereof are scheduled to take place under the existing Capital Adequacy Rules or any increases in the capital that any Lender is required to maintain to the extent that the increases are required due to a regulatory authority's action affecting only that Lender. (d) For purposes of this Section, "Lender" includes (but is not limited to) the Agent, the Lenders, as defined elsewhere in this Agreement, any assignee of any interest of any Lender hereunder and any participant in the loans made hereunder. The initial notice sent by a Lender shall be sent as promptly as practicable after that Lender learns that its Return has been reduced, shall include a demand for payment of the amount necessary to restore that Lender's Return for the quarter in which the notice is sent, and shall state in reasonable detail the cause for the reduction in its Return and its calculation of the amount of such reduction. Thereafter, that Lender may send a new notice during each calendar quarter setting forth the calculation of the reduced Return for that quarter and including a demand for payment of the amount necessary to restore its Return for that quarter. Section 5.8 Failure of Any Lender to Make Advances. Should any ------------------------------------------- Lender default in making an Advance, the other Lenders shall not be released from their several obligations to make Advances as agreed hereunder, and, in the event such defaulting Lender is the Agent, the other Lenders shall forthwith appoint one of themselves to act as Agent. However, such default shall not obligate any of the Lenders to increase their Commitment Amounts. Without limiting any other remedies to which the Borrower may be entitled, Borrower shall be released from all liability to pay such defaulting Lender any accrued or future fees under Section 5.1 and the other obligations of the Borrower to such defaulting Lender under the Loan Documents, except the obligation to repay any outstanding Term Loan and Revolving Loans theretofore made by such Lender and interest accrued thereon as provided in the Loan Documents, shall terminate; provided, however, once such default is cured, then such defaulting Lender - -------- ------- shall, subsequent thereto, have all rights under the Loan Documents. ARTICLE VI. CONDITIONS PRECEDENT Section 6.1 Initial Conditions Precedent. The obligation of the ------------------------------ Lenders to make any Advance and the obligation of the Agent to issue its initial Letter of Credit (whichever first occurs) is, in addition to the conditions precedent specified in Section 6.2, subject to the condition precedent that the Agent shall have received all of the following, each dated (unless otherwise indicated) as of the date hereof, in form and substance satisfactory to each Lender: (a) The Notes, properly executed on behalf of the Borrower. (b) Current searches of appropriate filing offices showing that (i) no state or federal tax liens have been filed and remain in effect against any of the Borrower, First Bank or San Francisco Company, (ii) no financing statements have been filed and remain in effect against any of the Borrower, First Bank or San Francisco Company except financing statements perfecting only Liens permitted under Section 9.1, and (iii) no judgment liens are in effect against any of the Borrower, First Bank or San Francisco Company. (c) Separate certificates of the secretaries of the Borrower and San Francisco Company certifying, in the case of each such corporation, (i) that the execution, delivery and performance of the Loan Documents and other documents contemplated hereunder to which such corporation is a party have been duly approved by all necessary action of the Board of Directors of such corporation, and attaching true and correct copies of the applicable resolutions granting such approval, (ii) that attached to such certificate are true and correct copies of the current articles of incorporation and bylaws of such corporation, as amended, together with such copies, and (iii) the names of the officers of Borrower such corporation who are authorized to sign the Loan Documents and other documents contemplated hereunder to which such corporation is a party, including, with respect to the Borrower, requests for Advances and L/C Applications, together with the true signatures of such officers. The Agent and the Lenders may conclusively rely on each such certificate until they shall receive a further certificate of the Secretary or Assistant Secretary of the applicable corporation canceling or amending the prior certificate and submitting the signatures of the officers named in such further certificate. (d) A certificate of good standing of the Borrower, San Francisco Company and First Bank, dated not more than twenty (20) days before the date of the first Advance. (e) A signed copy of an opinion of counsel for the Borrower and San Francisco Company, addressed to the Lenders as to matters referred to in Sections 7.1, 7.2, 7.3 and 7.7, and as to such other matters as the Lenders may reasonably request, with that opinion being subject to customary assumptions and limitations and reasonably acceptable to each Lender's counsel. In the case of Section 7.7, the opinion may be to the best knowledge of such counsel, and, in the case of Section 7.3, insofar as it relates to enforcement of remedies, it may be subject to applicable bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally from time to time, and to usual equity principles. (f) The Borrower Pledge Agreement, duly executed by the Borrower. (g) Certificates representing, in the aggregate, all of the issued and outstanding capital stock of San Francisco Company and one blank stock power executed by Borrower for each such certificate. (h) The San Francisco Company Security Agreement, duly executed by San Francisco Company. (i) Certificates representing, in the aggregate, all of the issued and outstanding capital stock of First Bank and one blank stock stock power executed by San Francisco Company for each such certificate. (j) The San Francisco Company Guaranty, duly executed by San Francisco Company. (k) Evidence that all of the Borrower's obligations under the Existing Credit Agreement have been paid and discharged in full, or will be so paid and discharged from proceeds of the first Borrowing. (l) The Borrower shall have paid the following sums: (i) to Agent for the benefit of the Lenders, a commitment fee equal to 15 basis points (0.15%) applied to the aggregate of (1) the Letter of Credit Commitment Amount, (2) all Lenders' Term Loan Commitment Amounts, and (3) all Lenders' Revolving Credit Commitment amounts; and (ii) to Agent any fees (in addition to that provided in clause (i)) provided for in Fee Letter agreement between Borrower and Agent dated June 7, 2005. Fees provided for at this Section 6.1(l) shall be in addition to all fees provided for at Article V hereof. It is acknowledged that Agent currently maintains possession of the documents described in subsections (g) and (i) pursuant to the Existing Credit Agreement; and that such possession will satisfy the requirements of such subsections. Section 6.2 Conditions Precedent to All Advances. The obligation of ------------------------------------ each Lender to make any Advance (including the initial Advance) and the obligation of the Agent to issue any Letter of Credit shall be subject to the further conditions precedent that on the date of such Advance: (a) The representations and warranties contained in Article VII are correct on and as of the date of such Advance as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. (b) No event has occurred and is continuing, or would result from such Advance, which constitutes a Default or an Event of Default. ARTICLE VII. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lenders as follows: Section 7.1 Corporate Existence and Power. ----------------------------- (a) The Borrower (i) is a corporation duly incorporated, validly existing and in good standing under the laws of the state of its incorporation, and is duly licensed or qualified to transact in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary and where failure to be so licensed or qualified would have a materially adverse impact on its business or properties; (ii) is in compliance with the requirements of applicable laws and regulations, the noncompliance with which would materially and adversely affect its business or financial condition; and (iii) has all requisite power and authority to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, the Loan Documents. (b) Each Subsidiary (i) is a business entity, including, but not limited to any corporation, limited liability company, partnership, limited partnership, limited liability partnership, business trust, or any similar entity, duly incorporated or organized, as applicable, validly existing and in good standing under the laws of the state of its incorporation, organization, or formation, as applicable, and is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary and where failure to be so licensed or qualified would have a materially adverse impact on its business or properties; (ii) is in compliance with the requirements of applicable laws and regulations, the noncompliance with which would materially and adversely affect its business or financial condition; and (iii) has all requisite power and authority to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, the Loan Documents. Section 7.2 Authorization of Borrowing; No Conflict as to Law or ------------------------------------------------------- Agreements. The execution, delivery and performance by the Borrower and each of - ---------- its Subsidiaries of the Loan Documents to which it is a party and the Borrowings and requests for Letters of Credit from time to time hereunder have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the stockholders of the Borrower or any of its Subsidiaries, or any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, except such as have already been obtained, (ii) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to the Borrower or any of its Subsidiaries or of the Articles of Incorporation or Bylaws of the Borrower or any of its Subsidiaries (or Articles of Organization, Operating Agreement, or any other governing document of a Subsidiary in the case of a Subsidiary that is organized as a business entity other than a corporation), (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower or any of its Subsidiaries is a party or by which it or its properties may be bound or affected, or (iv) result in, or require, the creation or imposition of any Lien or other charge or encumbrance of any nature upon or with respect to any of the properties now owned or hereafter acquired by the Borrower or any of its Subsidiaries. Section 7.3 Legal Agreements. This Agreement and the other Loan ----------------- Documents to which it is a party constitute the legal, valid and binding obligations of the Borrower and each of its Subsidiaries, as applicable, enforceable against each such party in accordance with their respective terms. Section 7.4 Subsidiaries. Except as listed in Schedule 7.4, as of ------------ the date of this Agreement the Borrower has no direct or indirect Subsidiaries. The percentage of the capital stock of each Subsidiary owned by the Borrower or by one or more other Subsidiaries is as set forth in Schedule 7.4. Section 7.5 Financial Condition. The Borrower has heretofore -------------------- furnished to the Lenders its audited financial statements as of December 31, 2004, and call reports of the Bank Subsidiaries dated as of March 31, 2005. Those financial statements fairly present the financial condition of the Borrower and its Subsidiaries on the dates thereof and the results of their operations and cash flows for the periods then ended, and were prepared in accordance with GAAP, subject, in the case of the interim financial statements, to year-end audit adjustments. Section 7.6 Adverse Change. There has been no material adverse -------------- change in the business, properties or condition (financial or otherwise) of the Borrower or its Subsidiaries since the date of the latest financial statements referred to in Section 7.5. Section 7.7 Litigation. Except as disclosed in Schedule 7.7, as of ---------- the date of this Agreement, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries or the properties of the Borrower or any of its Subsidiaries before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to the Borrower or any of its Subsidiaries, would have a material adverse effect on the financial condition, properties, or operations of the Borrower or any of its Subsidiaries. Section 7.8 Regulation U. No part of the proceeds of any Advance ------------ will be used by the Borrower or any Bank Subsidiary directly or indirectly, (i) to purchase or carry any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System; herein, the "Board") or to extend credit to others for the purpose of purchasing or carrying any margin stock or (ii) for any purpose which entails a violation of, or which is inconsistent with, the provisions of Regulation U issued by the Board. Section 7.9 Taxes. The Borrower and each of its Subsidiaries has ----- paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by it. The Borrower and each of its Subsidiaries has filed all federal, state and local tax returns which to the knowledge of the officers of the Borrower are required to be filed, and the Borrower and each of its Subsidiaries has paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by it to the extent such taxes have become due, other than taxes whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which the Borrower or its Subsidiary, as applicable, has provided adequate reserves in accordance with GAAP. Section 7.10 Titles. The Borrower or its Subsidiaries, as ------ applicable, have good title to each of the material properties and assets reflected in the latest audited financial statements referred to in Section 7.5. Section 7.11 ERISA. As of the date of this Agreement, no Plan ----- established or maintained by the Borrower or any ERISA Affiliate that is subject to Part 3 of Subtitle B of Title I of ERISA had an accumulated funding deficiency (as such term is defined in Section 302 of ERISA) in excess of $1,000,000 as of the last day of the most recent fiscal year of such Plan ended prior to the date hereof, and no liability to the PBGC or the Internal Revenue Service in excess of such amount has been, or is expected by the Borrower or any ERISA Affiliate to be, incurred with respect to any Plan of the Borrower or any ERISA Affiliate. Neither the Borrower nor any of its Subsidiaries has any contingent liability with respect to any post-retirement benefit under a Welfare Plan as described in Section 3(1) of ERISA, other than liability for continuation coverage described in Part 6 of Subtitle B of Title I of ERISA. Section 7.12 Regulatory Matters. Borrower is registered as a bank ------------------- holding company under the Bank Holding Company Act, as amended ("BHCA"). First Bank is an "insured depository institution" as defined in the Federal Deposit Insurance Act, as amended ("FDIA"), and the applicable regulations thereunder and the deposits of First Bank are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation to the maximum extent permitted under the FDIA. ARTICLE VIII. AFFIRMATIVE COVENANTS So long as any Note or L/C Application or any other Obligation shall remain unpaid, any Commitment shall be outstanding or the Agent shall have any obligation to issue Letters of Credit, the Borrower will comply, and will cause each of its Subsidiaries to comply, with the following requirements, unless the Required Lenders shall otherwise consent in writing: Section 8.1 Reporting Requirements. The Borrower will deliver to ----------------------- each Lender: (a) As soon as available, and in any event within ninety (90) days after the end of each fiscal year of the Borrower, a copy of the annual audit report of the Borrower with the unqualified opinion of independent certified public accountants selected by the Borrower and to which the Agent and the Required Lenders do not reasonably object. (b) As soon as available, and in any event within forty- five (45) days after the end of each fiscal quarter of the Borrower, a copy of the Borrower's Quarterly Report on Form 10Q filed with the SEC with respect to such fiscal quarter. (c) As soon as available, and in any event within ninety (90) days after the end of each fiscal year of the Borrower, the Complete Annual Report of Domestic Holding Companies (FRY-6 Report) required by the Federal Reserve Bank of St. Louis. (d) As soon as available, and in any event no later than forty-five (45) days after the end of each calendar quarter, the complete FRY-9LP and FRY-9C reports required to be filed by the Borrower and its Subsidiaries quarterly with the Federal Reserve Banks of the districts where they report. (e) As soon as available, and in any event within forty- five (45) days after the end of each calendar quarter, the complete call report prepared by each Bank Subsidiary at the end of such calendar quarter in compliance with the requirements of any federal or state regulatory agency which has authority to examine such Bank Subsidiary, prepared in accordance with the requirements imposed by the applicable regulatory authorities and applied on a basis consistent with the accounting practices reflected in any previous call reports and similar statements delivered to the Agent prior to the date of this Agreement. (f) As soon as available, and in any event within forty- five (45) days after the end of each calendar quarter, a Compliance Certificate, duly executed by the chief financial officer of the Borrower and one (1) additional officer of the Borrower identified on the signature page of the form of Compliance Certificate of which Exhibit C is a copy. (g) Promptly after the Borrower learns of the commencement of any litigation or proceedings before any governmental or regulatory agency that would be required to be disclosed by Borrower pursuant to any applicable provision of either the Securities Act of 1933, the Securities Exchange Act of 1934, or any applicable regulation under either thereof (assuming that such litigation or proceeding had then been determined adversely to the Borrower or any of its Subsidiaries), notice in writing thereof. (h) As promptly as practicable (but in any event not later than five (5) business days) after the Borrower or an executive officer of any of its Subsidiaries obtains knowledge of the occurrence of any Default or Event of Default, notice of such occurrence, together with a detailed statement by a responsible officer of the Borrower of the steps being taken by the Borrower to cure the effect of such event. (i) Promptly upon the filing thereof, copies of all registration statements and all annual and quarterly reports which the Borrower or any Subsidiary of the Borrower shall have filed with the SEC. (j) Such other information respecting the financial condition and results of operations of the Borrower or any of its Subsidiaries as any Lender may from time to time reasonably request. (k) Promptly after learning of the commencement of any regulatory action involving safety or soundness issues with respect to the Borrower or such Subsidiary, and, unless prohibited by applicable law or regulation, not less than five (5) Business Days before entering into any agreement or understanding involving any such issues, notice in writing thereof. Section 8.2 Books and Records; Inspection and Examination. The ------------------------------------------------- Borrower and each of its Subsidiaries will keep accurate books of record and account for itself in which true and complete entries will be made in accordance with GAAP and, upon request of any Lender, will give any representative of that Lender reasonable access to, and permit such representative to examine, copy or make extracts from, any and all books, records and documents in its possession, to inspect any of its properties and to discuss its affairs, finances and accounts with any of its principal officers, all at such times during normal business hours and as often as any Lender may reasonably request; provided, -------- however, that with respect to the loans made by any Bank Subsidiary, a Lender - ------- may only review and make copies of summaries of the watch lists prepared on a quarterly basis and loan credit reports; review of specific loan accounts and loan review reports may be requested by any Lender, whereupon the Borrower and such Lender shall within ten (10) days agree to the number of such accounts and reports that are reasonable and appropriate to review; provided further, -------- ------- however, that during the continuance of any Default or Event of Default, there - ------- shall be no restrictions upon the scope of the review, inspection and reproduction rights of the Lenders concerning the loans of any Bank Subsidiary. Section 8.3 Compliance with Laws. The Borrower and each of its --------------------- Subsidiaries will comply with the requirements of applicable laws and regulations, the noncompliance with which would materially and adversely affect its business or the financial condition of the Borrower or any of its Subsidiaries. Section 8.4 Payment of Taxes and Other Claims. The Borrower and --------------------------------- each of its Subsidiaries will pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien or charge upon any properties of the Borrower or any of its Subsidiaries; provided, that neither the Borrower nor any of its Subsidiaries shall be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which the Borrower or its Subsidiary, as applicable, has provided adequate reserves in accordance with GAAP. Section 8.5 Operations. The Borrower will, and will cause each of ---------- its Subsidiaries to, operate and maintain its business and property in the ordinary course in a prudent manner consistent with sound banking practices and in such a manner that the performance by the Borrower of its Obligations hereunder is not jeopardized or impaired. Section 8.6 Insurance. The Borrower and each of its Subsidiaries --------- will obtain and maintain insurance with insurers believed by it to be responsible and reputable, in such amounts and against such risks as the Borrower considers prudent and economical. Without limiting the foregoing, the Borrower will cause the Bank Subsidiaries to maintain blanket bond coverage, property and casualty coverage, and errors and omissions coverage as customary for banks. Section 8.7 Preservation of Corporate Existence. The Borrower and ----------------------------------- each of its Subsidiaries will preserve and maintain its corporate existence and all of its material rights, privileges and franchises; provided, however, that -------- ------- neither the Borrower nor its Subsidiaries shall be required to preserve any of its rights, privileges and franchises if its Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of its business and that the loss thereof is not disadvantageous in any material respect to any Lender as a holder of a Note. Section 8.8 Additional Collateral. The Borrower will deliver, and --------------------- cause San Francisco Company to deliver, to the Agent any shares of capital stock of any FDIC-insured financial institution or its holding company acquired in whole or in part with the proceeds of Advances if either (A) 20 percent or more of any class of the voting securities of such entity are acquired (including for such purpose any such voting securities then owned by Borrower and any Subsidiary), or (B) the Borrower's investment therein is $2 million or more (including for such purpose any outstanding investment theretofore made); provided, however, that the Borrower need not deliver such shares if such entity - -------- ------- is immediately merged with or consolidated into a Subsidiary. Any shares of capital stock so delivered shall constitute additional Collateral under the Borrower Pledge Agreement (if delivered by the Borrower) or the San Francisco Company Security Agreement (if delivered by San Francisco Company). The Borrower need not deliver to the Agent any shares of capital stock of any FDIC-insured financial institution or its holding company acquired in whole or in part with the proceeds of Advances unless and until it either has acquired 20 percent or more of any class of the voting securities or its investment therein becomes at least $2 million or more; however the Borrower will not, and will not permit San Francisco Company to, grant any security interest in such shares to any third party. Section 8.9 Notice of Acquisition. Within five (5) days after the --------------------- Borrower or a Subsidiary enters into a definitive agreement in connection with a Permitted Acquisition of an entity whose assets are equal to or in excess of $500,000,000, the Borrower will notify the Agent of such acquisition in writing. Any notice required by the immediately preceding sentence shall be accompanied by a Schedule in the form of Exhibit L, duly completed and executed on behalf of the Borrower, demonstrating that the subject Permitted Acquisition will not result in an Event of Default. ARTICLE IX. NEGATIVE COVENANTS So long as any Note or any other Obligation shall remain unpaid, any Commitments shall be outstanding, or the Agent shall have any obligation to issue Letters of Credit, the Borrower will comply, and will cause each of its Subsidiaries to comply, with the following covenants unless the Required Lenders shall otherwise consent in writing: Section 9.1 Liens. The Borrower will not create, incur, assume or ----- suffer to exist, or permit San Francisco Company to create, incur, assume or suffer to exist, any Lien or other charge or encumbrance of any nature on any of the Collateral, now owned or hereafter acquired, or assign or otherwise convey any right to receive income with respect to the Collateral or give its consent to the subordination of any right or claim of the Borrower to any right or claim of any other Person. Section 9.2 Indebtedness. Neither the Borrower nor any of its ------------ Subsidiaries that are not Bank Subsidiaries will incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except: (a) Indebtedness to the Lenders under the Notes. (b) Indebtedness of the Borrower or its Subsidiaries listed in Schedule 9.2 hereto, and any extensions or renewals thereof. (c) Indebtedness of the Borrower or any of its Subsidiaries that may be treated as regulatory capital, or that is issued to provide a source of repayment of securities that may be treated as regulatory capital, of the Borrower or such Subsidiary. (d) Subordinated Debt, or renewals or extensions thereof. (e) Indebtedness not otherwise permitted under this Section 9.2, so long as all such indebtedness does not exceed $5,000,000 in the aggregate outstanding at any one time. Section 9.3. Guaranties. Neither the Borrower nor any of its ---------- Subsidiaries will assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) The endorsement of negotiable instruments by the Borrower or any of its Subsidiaries for deposit or collection or similar transactions in the ordinary course of business. (b) Guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons in existence on the date hereof and listed in Schedule 9.3 hereto. (c) Letters of credit and other obligations in the nature of guaranties incurred by the Bank Subsidiaries in the ordinary course of their banking businesses. (d) Guaranties of obligations permitted by Section 9.2(c). (e) Other assumptions, guarantees, endorsements and similar liabilities in connection with obligations of other Persons, not in excess of $5,000,000 in the aggregate outstanding at any one time. Section 9.4 Shareholder Redemptions. The Borrower will not make any ----------------------- payments on account of the purchase, redemption or other retirement of any of its common stock or preferred stock, directly or indirectly. Section 9.5 Acquisitions. Neither the Borrower nor any of its ------------ Subsidiaries will engage in an Acquisition with any Person, whether as acquirer or acquiree, or engage in any other transaction analogous in purpose or effect to an Acquisition, except that the foregoing shall not prohibit any Permitted Acquisition. Section 9.6 Subordinated Debt. Neither the Borrower nor any of its ----------------- Subsidiaries will (i) make any payment of, or acquire, any Subordinated Debt except as expressly permitted by the subordination provision thereof; (ii) give security for all or any part of such Subordinated Debt; (iii) amend or cancel the subordination provisions of such Subordinated Debt; (iv) take or omit to take any action as a result of which the subordination of such Subordinated Debt or any part thereof to the Notes might be terminated, impaired or adversely affected; or (v) omit to give the Lenders prompt written notice of any default under any agreement or instrument relating to such Subordinated Debt by reason whereof such Subordinated Debt might become or be declared to be immediately due and payable. Section 9.7 Restrictions on Nature of Business. The Borrower will ---------------------------------- not, and will not permit any of its Subsidiaries to, change the nature of its business substantially, and will not engage, or permit any of its Subsidiaries to engage, in any line of business if, as a result thereof, the business of the Borrower and its Subsidiaries, taken as a whole, would not be predominantly the banking and thrift business (including activities deemed closely related to banking and/or thrift business by applicable regulatory authorities) as currently constituted. Section 9.8 Negative Pledges; Subsidiary Restrictions. The Borrower ----------------------------------------- will not, and will not permit any Subsidiary (including Bank Subsidiaries) to, enter into any agreement, bond, note or other instrument with or for the benefit of any Person other than the Lenders which would (i) prohibit the Borrower or such Subsidiary from granting, or otherwise limit the ability of the Borrower or such Subsidiary to grant, to the Lenders any Lien on any assets or properties of the Borrower or such Subsidiary (it being agreed, however, that nothing herein shall preclude the Bank Subsidiaries from granting security interests to secure deposits), or (ii) require the Borrower or such Subsidiary to grant a Lien to any other Person if the Borrower or such Subsidiary grants any Lien to the Lenders. Except pursuant to any applicable law or regulation, the Borrower will not permit any Subsidiary to place or allow any restriction, directly or indirectly, on the ability of such Subsidiary to (a) pay dividends or any distributions on or with respect to such Subsidiary's capital stock or (b) make loans or other cash payments to the Borrower. Section 9.9 Issuance of Additional Stock. Neither the Borrower nor ---------------------------- any Subsidiary whose shares are pledged pursuant to either the Borrower Pledge Agreement or the San Francisco Company Security Agreement will (and Borrower will not permit any of the same) to issue any additional shares of capital stock unless such additional shares are immediately pledged pursuant to the Borrower Pledge Agreement or the San Francisco Company Security Agreement, as applicable. Section 9.10 Regulatory Matters. Borrower shall not cease to be ------------------- registered as a bank holding company under the BHCA. First Bank shall not cease to be an insured depository institution as defined in the FDIA nor shall its deposits cease to be insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation to the maximum extent permitted under the FDIA. Section 9.11 Dividends. Neither Borrower nor any Subsidiary shall --------- pay any dividends or make any distribution in respect of its common or preferred stock (other than dividends payable in the payor's own common stock or dividends paid to Borrower) excepting only that (i) the Borrower may declare or pay cash dividends to holders of the common or preferred stock of Borrower provided the aggregate amount of all such cash dividends declared or paid in such fiscal year do not exceed 25% of Borrower's consolidated net income for the immediately preceding fiscal year and (ii) a trust issuer may pay distributions on both its trust preferred securities and its common securities, in each case in accordance with their respective terms; provided however that, notwithstanding the foregoing, no cash dividends or other distribution may be declared or paid if either a Default exists on the date of such declaration or payment or a Default will result therefrom. ARTICLE X. FINANCIAL COVENANTS Section 10.1 Total Risk Based Capital Ratio. The Borrower shall ------------------------------ maintain on a consolidated basis, and shall cause each Bank Subsidiary to maintain, its Total Risk Based Capital Ratio at not less than 10%, determined as of each quarter end. Section 10.2 Tier I Risk Based Capital Ratio. The Borrower shall -------------------------------- maintain on a consolidated basis, and shall cause each Bank Subsidiary to maintain, its Tier I Risk Based Capital Ratio at not less than six percent (6%), determined as of each quarter end. Section 10.3 Leverage Ratio. The Borrower shall maintain on a --------------- consolidated basis, and shall cause each Bank Subsidiary to maintain, a minimum Tier I Leverage Ratio of not less than 5%, determined as of each quarter end. Section 10.4 Minimum Return on Assets. The Borrower will maintain ------------------------ (on a consolidated basis) its Return on Assets, determined as of each calendar quarter end, at not less than .70%. Section 10.5 Maximum Non-Performing Assets. The Borrower will -------------------------------- maintain on a consolidated basis, its Non-Performing Assets at an amount not greater than twenty percent (20%) of its Primary Equity Capital, determined as of the end of each calendar quarter. Section 10.6 Allowance for Loan and Lease Losses. The Borrower will ------------------------------------- maintain, on a consolidated basis, its allowance for loan and lease losses at not less than 100% of its Non-Performing Assets. The allowance for loan and lease losses at any time shall be the amount set forth in the most recent quarterly report on Form 10-Q or annual report on Form 10-K filed by the Borrower with the SEC (or any successor report). ARTICLE XI. EVENTS OF DEFAULT, RIGHTS AND REMEDIES Section 11.1 Events of Default. "Event of Default", wherever used ------------------ herein, means any one of the following events: (a) Default in the payment of principal of any Note when the same becomes due and payable. (b) Default in the payment of interest on any Note or of any fees or other amounts required to be paid under this Agreement, and the continuance of such default for a period of ten days or more. (c) Failure to pay when due any amount specified in Section 2.3.2 hereof relating to the Borrower's Obligation of Reimbursement, or failure to pay immediately when due any amounts required to be paid for deposit in the Special Account. (d) Default in the performance, or breach, of any covenant or agreement on the part of the Borrower contained in any Financial Covenant or in Article IX hereof. (e) Default in a material respect in the performance, or breach, of any covenant or agreement of the Borrower in this Agreement (other than a covenant or agreement a default in whose performance or whose breach is elsewhere specifically dealt with in this Section), and the continuance of such default or breach for a period of 30 days after the date on which an executive officer of the Borrower or any of its Subsidiaries first obtains knowledge of such default or breach. (f) Any representation or warranty made by the Borrower in this Agreement or by the Borrower (or any of its officers) or any of its Subsidiaries (or any of its officers) in any other Loan Document, certificate, instrument, or statement contemplated by or made or delivered pursuant to or in connection with this Agreement, shall prove to have been incorrect or misleading in any material respect when made. (g) A default under any bond, debenture, note or other evidence of indebtedness of the Borrower or any of its Subsidiaries in excess of $2,000,000 (other than to the Lenders) or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed where a party thereto has the right to accelerate any indebtedness owing thereunder to such party from the Borrower or any of its Subsidiaries as a result of such default, or any default by the Borrower or any of its Subsidiaries in the payment of required principal or interest under any of the foregoing agreements or instruments. (h) An event of default shall occur under any security agreement, mortgage, deed of trust, assignment or other instrument or agreement directly or indirectly securing any obligations of the Borrower hereunder or under any Note or under any guaranty of such obligations. (i) Default in the payment of any amount in excess of $2,000,000 owed by the Borrower or any of its Subsidiaries to any Lender other than hereunder or under the Notes and the expiration of the applicable period of grace, if any, with respect thereto; provided, however, that if such default shall be cured by the Borrower -------- ------- or its Subsidiary, as applicable, as may be permitted by the terms of such indebtedness, or waived by the Lender holding such indebtedness, in each case prior to the commencement of any action under Section 11.2, then the Event of Default hereunder by reason of such default shall be deemed likewise to have been thereupon cured or waived. (j) The Borrower or any of its Subsidiaries shall be adjudicated a bankrupt or insolvent, or admit in writing its inability to pay its debts as they mature, or make an assignment for the benefit of creditors; or the Borrower or any of its Subsidiaries shall apply for or consent to the appointment of any receiver, trustee, or similar officer for it or for all or any substantial part of its property; or such receiver, trustee or similar officer shall be appointed without the application or consent of the Borrower or its Subsidiary, as applicable, and such appointment shall continue undischarged for a period of thirty (30) calendar days; or the Borrower or any of its Subsidiaries shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against the Borrower or any of its Subsidiaries and shall continue without dismissal for a period of thirty (30) calendar days; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of the Borrower or any of its Subsidiaries and such judgment, writ, or similar process shall not be released, vacated or fully bonded within thirty (30) days after its issue or levy. (k) A petition shall be filed by the Borrower or any of its Subsidiaries under the United States Bankruptcy Code naming the Borrower or any of its Subsidiaries as debtor; or an involuntary petition shall be filed against the Borrower or any of its Subsidiaries under the United States Bankruptcy Code, and such petition shall not have been dismissed within forty-five (45) days after the Borrower or the applicable Subsidiary has received notice of such filing; or an order for relief shall be entered in any case under the United States Bankruptcy Code naming the Borrower or any of its Subsidiaries as debtor. (l) The rendering against the Borrower or any of its Subsidiaries of a final judgment, decree or order for the payment of money in excess of $10,000,000 and the continuance of such judgment, decree or order unsatisfied and in effect for any period of thirty (30) consecutive days without a stay of execution or other similar relief. (m) A writ of attachment, garnishment, levy or similar process shall be issued against or served upon the Agent or any Lender with respect to (i) any property of the Borrower or any of its Subsidiaries in the possession of the Agent or such Lender, or (ii) any indebtedness of the Agent or such Lender to the Borrower or any of its Subsidiaries, and the same shall not be lifted within 30 days. (n) A trustee shall have been appointed by an appropriate United States District Court to administer any Plan, or the PBGC, shall have instituted proceedings to terminate any Plan or to appoint a trustee to administer any Plan, or withdrawal liability shall have been asserted against the Borrower or any ERISA Affiliate by a Multiemployer Plan; or the Borrower or any ERISA Affiliate shall have incurred liability to the PBGC, the Internal Revenue Service, the Department of Labor or Plan participants in excess of $2,000,000 with respect to any Plan; or any Reportable Event that the Required Lenders may determine in good faith might constitute grounds for the termination of any Plan, for the appointment by the appropriate United States District Court of a trustee to administer any Plan or for the imposition of withdrawal liability with respect to a Multiemployer Plan, shall have occurred and be continuing thirty (30) days after written notice to such effect shall have been given to the Borrower by the Lenders. (o) The issuance against the Borrower or any Subsidiary of the Borrower (including without limitation, any Bank Subsidiary) of any informal or formal administrative action, temporary or permanent, by any federal or state regulatory agency having jurisdiction or control over the Borrower or such Subsidiary, such action taking the form of, but not limited to: (i) any directive citing conditions or activities deemed to be unsafe or unsound or breaches of fiduciary duty or law or regulation; (ii) a memorandum of understanding; (iii) a cease and desist order; (iv) the termination of insurance coverage of customer deposits by the Federal Deposit Insurance Corporation; (v) the suspension or removal of an executive officer or director, or the prohibition of participation by any others in the business affairs of the Borrower or such Subsidiary; (vi) a capital maintenance agreement; or (vii) any other regulatory action, agreement or understanding involving safety or soundness issues with respect to the Borrower or such Subsidiary which the Required Lenders reasonably believe may have a material adverse effect on Borrower or any Subsidiary. An Event of Default under clause (vii) above shall occur only upon written notice to Borrower of the Required Lenders' determination. (p) James F. Dierberg, Mary W. Dierberg, members of their immediate family, and trusts, partnerships and other organizations of which they have effective voting Control shall cease to own in the aggregate at least fifty-one percent (51%) of the voting shares of the Borrower. Section 11.2 Rights and Remedies. Upon the occurrence of an Event ------------------- of Default or at any time thereafter until such Event of Default is cured to the written satisfaction of the Required Lenders, the Agent may, with the consent of the Required Lenders, and shall, upon written request of the Required Lenders: (a) By notice to the Borrower, declare the Commitments and the Agent's obligation to issue Letters of Credit to be terminated, whereupon the same shall forthwith terminate. (b) By notice to the Borrower, declare the entire unpaid principal amount of the Notes then outstanding, all interest accrued and unpaid thereon, and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Notes, all such accrued interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower. (c) By notice to the Borrower, require the Borrower to pay to the Agent in immediately available funds, for deposit in the Special Account, an amount equal to the maximum aggregate amount available to be drawn under all Letters of Credit then outstanding. (d) Without notice to the Borrower and without further action, apply (and direct each Lender to apply) any and all money owing by any Lender to the Borrower to the payment of the Notes then outstanding, including interest accrued thereon, and of all other Obligations. (e) Exercise any other rights and remedies available to the Agent and the Lenders by law or agreement. Notwithstanding the foregoing, upon the occurrence of an Event of Default described in Section 11.1(j) or (k) hereof, the entire unpaid principal amount of the Notes then outstanding, all interest accrued and unpaid thereon, and all other Obligations shall be immediately due and payable without presentment, demand, protest or notice of any kind. Section 11.3 Offset. In addition to the remedies set forth in ------ Section 11.2, upon the occurrence of any Event of Default and thereafter while the same be continuing, the Borrower hereby irrevocably authorizes each Lender to set off any Obligations owed to such Lender (including for this purpose all participations in Letters of Credit owned by such Lender) against all deposits and credits of the Borrower with, and any and all claims of the Borrower against, such Lender. Such right shall exist whether or not such Lender shall have made any demand hereunder or under any other Loan Document, whether or not the Obligations, or any part thereof, or deposits and credits held for the account of the Borrower is or are matured or unmatured, and regardless of the existence or adequacy of any collateral, guaranty or any other security, right or remedy available to such Lender or Lenders. Each Lender agrees that, as promptly as is reasonably possible after the exercise of any such setoff right, it shall notify the Borrower of its exercise of such setoff right; provided, -------- however, that the failure of such Lender to provide such notice shall not affect - ------- the validity of the exercise of such setoff rights. ARTICLE XII. THE AGENT Section 12.1 Authorization. Each Lender and the holder of each Note ------------- irrevocably appoints and authorizes the Agent to act on behalf of such Lender or holder to the extent provided herein or in any document or instrument delivered hereunder or in connection herewith, and to take such other action as may be reasonably incidental thereto. Section 12.2 Distribution of Payments and Proceeds. ------------------------------------- (a) After deduction of any costs of collection as hereinafter provided, the Agent shall remit to each Lender that Lender's Percentage of all payments of principal, interest, fees and other amounts for the account of the Lenders that are received by the Agent under the Loan Documents. Each Lender's interest in the Loan Documents shall be payable solely from payments, collections and proceeds actually received by the Agent under the Loan Documents; and the Agent's only liability to the Lenders hereunder shall be to account for each Lender's Percentage of such payments, collections and proceeds in accordance with this Agreement. If the Agent is ever required for any reason to refund any such payments, collections or proceeds, each Lender will refund to the Agent, upon demand, its Percentage of such payments, collections or proceeds, together with its Percentage of interest or penalties, if any, payable by the Agent in connection with such refund. The Agent may, in its sole discretion, make payment to the Lenders in anticipation of receipt of payment from the Borrower. If the Agent fails to receive any such anticipated payment from the Borrower, each Lender shall promptly refund to the Agent, upon demand, any such payment made to it in anticipation of payment from the Borrower, together with interest for each day on such amount until so refunded at a rate equal to the Federal Funds Rate for each such date. (b) Notwithstanding the foregoing, if any Lender has wrongfully refused to fund its Percentage of any Borrowing or other Advance as required hereunder, or if the principal balance of any Lender's Note is for any other reason less than its Percentage of the aggregate principal balances of the Notes then outstanding, the Agent may remit all payments received by it to the other Lenders until such payments have reduced the aggregate amounts owed by the Borrower to the extent that the aggregate amount owing to such Lender hereunder is equal to its Percentage of the aggregate amount owing to all of the Lenders hereunder. The provisions of this paragraph are intended only to set forth certain rules for the application of payments, proceeds and collections in the event that a Lender has breached its obligations hereunder and shall not be deemed to excuse any Lender from such obligations. Section 12.3 Expenses. All payments, collections and proceeds -------- received or effected by the Agent may be applied, first, to pay or reimburse the Agent for all costs, expenses, damages and liabilities at any time incurred by or imposed upon the Agent in connection with this Agreement or any other Loan Document (including but not limited to all reasonable attorney's fees, foreclosure expenses and advances made to protect the security of any Collateral). If the Agent does not receive payments, collections or proceeds sufficient to cover any such costs, expenses, damages or liabilities within thirty (30) days after their incurrence or imposition, each Lender shall, upon demand, remit to the Agent its Percentage of the difference between (i) such costs, expenses, damages and liabilities, and (ii) such payments, collections and proceeds. Section 12.4 Payments Received Directly by Lenders. If any Lender or ------------------------------------- other holder of a Note shall obtain any payment or other recovery (whether voluntary, involuntary, by application of offset or otherwise) on account of principal of or interest on any Note other than through distributions made in accordance with Section 12.2, such Lender or holder shall promptly give notice of such fact to the Agent and shall purchase from the other Lenders or holders such participations in the Notes held by them as shall be necessary to cause the purchasing Lender or holder to share the excess payment or other recovery ratably with each of them; provided, however, that if all or any portion of the -------- ------- excess payment or other recovery is thereafter recovered from such purchasing Lender or holder, the purchase shall be rescinded and the purchasing Lender restored to the extent of such recovery (but without interest thereon). Section 12.5 Indemnification. The Agent shall not be required to do --------------- any act hereunder or under any other document or instrument delivered hereunder or in connection herewith or take any action toward the execution or enforcement of the agency hereby created, or to prosecute or defend any suit in respect of this Agreement or the Notes or any documents or instrument delivered hereunder or in connection herewith unless indemnified to its satisfaction by the holders of the Notes against loss, cost, liability and expense; provided, -------- however, that no Lender shall be obligated to indemnify the Agent for any - ------- portion of any such loss, cost, liability or expense resulting from the gross negligence or willful misconduct of the Agent. If any indemnity furnished to the Agent for any purpose shall, in the opinion of the Agent, be insufficient or become impaired, the Agent may call for additional indemnity and not commence or cease to do the acts indemnified against until such additional indemnity is furnished. Section 12.6 Limitations on Agent's Power. Notwithstanding any other ---------------------------- provision of this Agreement, the Agent shall not have the power, without the consent of all of the Lenders, to (i) forgive any indebtedness of the Borrower arising under this Agreement or the Notes, (ii) agree to reduce the rate of interest charged under this Agreement or the commitment fees payable under Sections 5.1 and 5.2, (iii) agree to extend the maturity or decrease the amount of any payment (whether of principal, interest, fees or otherwise) due under this Agreement or the Notes, (iv) release any Collateral from the Lien created by the Borrower Pledge Agreement or the San Francisco Company Security Agreement, or (v) amend the definition of "Required Lenders" in Section 1.1. In addition, in no event may the Agent increase the total Commitment Amount (being the aggregate sum of all Commitment Amounts of all Lenders) hereunder without the consent of all Lenders or increase or decrease the Commitment Amount of any given Lender without the consent of that Lender. Section 12.7 Exculpation. The Agent shall be entitled to rely upon ----------- advice of counsel concerning legal matters, and upon this Agreement, any Loan Document and any schedule, certificate, statement, report, notice or other writing which it believes to be genuine or to have been presented by a proper Person. Neither the Agent nor any of its directors, officers, employees or agents shall (a) be responsible for any recitals, representations or warranties contained in, or for the execution, validity, genuineness, effectiveness or enforceability of this Agreement, any Loan Document, or any other instrument or document delivered hereunder or in connection herewith, (b) be responsible for the validity, genuineness, perfection, effectiveness, enforceability, existence, value or enforcement of any collateral security, (c) be under any duty to inquire into or pass upon any of the foregoing matters, or to make any inquiry concerning the performance by the Borrower or any other obligor of its obligations, or (d) in any event, be liable as such for any action taken or omitted by it or them, except for its or their own gross negligence or willful misconduct. The agency hereby created shall in no way impair or affect any of the rights and powers of, or impose any duties or obligations upon, the Agent in its individual capacity. Section 12.8 Agent and Affiliates. The Agent shall have the same -------------------- rights and powers hereunder in its individual capacity as any other Lender, and may exercise or refrain from exercising the same as though it were not the Agent, and the Agent and its affiliates may accept deposits from and generally engage in any kind of business with the Borrower as fully as if the Agent were not the Agent hereunder. Section 12.9 Credit Investigation. Each Lender acknowledges that --------------------- it has made such inquiries and taken such care on its own behalf as would have been the case had its Commitment been granted and the Advances made directly by such Lender to the Borrower without the intervention of the Agent or any other Lender. Each Lender agrees and acknowledges that the Agent makes no representations or warranties about the creditworthiness of the Borrower, any Subsidiary or any other party to this Agreement or with respect to the legality, validity, sufficiency or enforceability of this Agreement, any Loan Document, or any other instrument or document delivered hereunder or in connection herewith. Section 12.10 Resignation. The Agent may resign as such at any time ----------- upon at least thirty (30) calendar days' prior notice to the Borrower and the Lenders. In the event of any resignation of the Agent, the Required Lenders shall as promptly as practicable appoint a successor Agent. If no such successor Agent shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty (30) calendar days after the resigning Agent's giving of notice of resignation, then the resigning Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon be entitled to receive from the prior Agent such documents of transfer and assignment as such successor Agent may reasonably request and the resigning Agent shall be discharged from its duties and obligations under this Agreement. After any resignation pursuant to this Section, the provisions of this Section shall inure to the benefit of the resigning Agent as to any actions taken or omitted to be taken by it while it was an Agent hereunder. Section 12.11 Assignments. ----------- (a) No Lender may assign any of its rights or obligations under any Loan Document without the prior written consent of the Borrower and the Agent, which consent may not be unreasonably withheld; provided, however, that the consent of the Borrower shall -------- ------- not be required in connection with any such assignment made at any time when a Default or an Event of Default has occurred and is continuing. Any assignment permitted hereunder shall be by written assignment agreement in form and substance reasonably satisfactory to Agent which assignment agreement shall be acknowledged by both Agent and Borrower. The aggregate principal amount of the Notes and the portion of the Commitment Amounts so assigned in any assignment shall be not less than $5,000,000, and the assigning Lender shall retain at least $5,000,000 of such Notes and Commitment Amounts for its own account; provided, however, that the foregoing restriction shall not -------- ------- apply to a Lender assigning its entire Note and Commitment Amount to a single institution. Simultaneously with each assignment of Notes and Commitment Amounts, the assigning Lender shall be deemed to have assigned a proportional share of its obligations and rights under Section 2.3.1(b). If the Agent and (if applicable) the Borrower so consent, then, from and after the effective date of any such assignment, the assignee thereunder (an "Additional Lender") shall, to the extent that rights and obligations hereunder have been assigned to it pursuant to such assignment, have the rights and obligations so assigned to it, and the assigning Lender shall, to the extent that rights and obligations have been assigned by it pursuant to such assignment, relinquish its rights and be released from its obligations under this Agreement. Within five (5) Bank Business Days after any request of the Agent following such assignment of Notes and Commitment Amounts, the Borrower will execute and deliver to the Agent new Notes to the order of such assignee in amounts corresponding to the interest in the assigning Lender's rights and obligations under this Agreement acquired by such assignee pursuant to such assignment and, if the assigning Lender has retained an interest in such rights and obligations, new Notes to the order of the assigning Lender in amounts corresponding to such interests retained by it hereunder. Such new Notes shall be in an aggregate principal amount equal to the aggregate principal amount of the Notes to be replaced by such new Notes, shall be dated the effective date of such assignment and shall otherwise be in the form of the Notes to be replaced thereby. Such new Notes shall be issued in substitution for, but not in satisfaction or payment of, the Notes being replaced thereby. The Agent shall bear the cost of preparation of such new Notes. Upon the issuance of such new Notes, the term, "Notes," as used herein, shall include all such new Notes issued pursuant to this Section 12.11. (b) Any Lender making an assignment under this Section shall pay the Agent a transfer fee in the amount of $3,000 simultaneous with such assignment. (c) Notwithstanding any other provision of this Agreement, any Lender may at any time create a security interest in all or any portion of its rights under this Agreement and that Lender's Notes in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System. (d) Except as set forth in this Section 12.11 and the following Section 12.12, no Lender may assign any of its rights or obligations under any Loan Document. Section 12.12 Participations. In addition to the rights granted in -------------- Section 12.11, each Lender may grant participations in a portion of its Notes, Commitments and obligations under Section 2.3.1(b) to any institutional investor, without the consent of the Borrower or the Agent, but only so long as (except in the case of a participation granted to an affiliate of a Lender, in which case the limitation and qualification set forth in clause (a) and (b) below shall not apply): (a) Within five (5) Bank Business Days after granting any participation, such Lender gives the Agent and the Borrower notice of such participation, including the name, address and telecopier number of the participant and the amount of the Notes and Commitments covered by the participation; and (b) The principal amount of the participations so granted is no less than $5,000,000. No holder of any such participation, other than an affiliate of such Lender, shall be entitled to require such Lender to take or omit to take any action hereunder, except that such Lender may agree with such participant that such Lender will not, without such participant's consent, (i) forgive any indebtedness of the Borrower under this Agreement or the Notes, (ii) agree to reduce the rate of interest charged under this Agreement, or (iii) agree to extend the final maturity of any indebtedness evidenced by the Notes, except as expressly provided by the terms of the Loan Documents. No Lender shall, as between the Borrower and such Lender, be relieved of any of its obligations hereunder as a result of any such granting of a participation. The Borrower hereby acknowledges and agrees that any participant described in this Section will, for purposes of Section 11.3, be considered to be a Lender hereunder (provided that such participant shall not be entitled to receive any more than the Lender selling such participation would have received had such sale not taken place) and may rely on, and possess all rights under, any opinions, certificates, or other instruments or documents delivered under or in connection with any Loan Document. Except as set forth in this Section 12.12, no Lender may grant any participation in any Loan Document or Commitment. Section 12.13 Disclosure of Information. The Borrower authorizes ------------------------- each Lender and the Agent to disclose to any participant, assignee or Additional Lender (each, a "Transferee") and any prospective Transferee any and all financial and other information in the possession of the Agent or any Lender concerning the Borrower which has been delivered to the Agent or such Lender by the Borrower pursuant to this Agreement or which has been delivered to the Agent or such Lender by the Borrower in connection with the credit evaluation of the Borrower by the Agent or such Lender prior to entering into this Agreement; provided, however, that prior to disclosing such information to a Transferee or - -------- ------- prospective Transferee, the applicable Lender shall obtain from such Transferee or prospective Transferee a confidentiality agreement agreeing that such information shall be used only in connection with such Person's evaluation and, if applicable, administration of its interest in this Agreement and the loans hereunder, and shall not be disclosed to any other Person, subject to exceptions permitting disclosure to regulators and auditors, disclosure as required by law or judicial process, and disclosure under such other limited circumstances as that Lender and such Transferee or prospective Transferee may reasonably agree. ARTICLE XIII. MISCELLANEOUS Section 13.1 No Waiver; Cumulative Remedies. No failure or delay on ------------------------------ the part of the Lenders in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall any Lender's acceptance of payments while any Default or Event of Default is outstanding operate as a waiver of such Default or Event of Default, or any right, power or remedy under the Loan Documents; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. Section 13.2 Amendments, Etc. No amendment, modification, ----------------- termination or waiver of any provision of any Loan Document or consent to any departure by the Borrower therefrom shall be effective unless the same shall be in writing and signed by the Required Lenders (or, in the case of any action described in Section 12.6, the number of Lenders specified for the applicable action in such Section) and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 13.3 Notice. Except as otherwise expressly provided ------ herein, all notices and other communications hereunder shall be in writing and shall be (i) personally delivered, (ii) transmitted by registered mail, postage prepaid, (iii) sent by Federal Express or similar expedited delivery service, or (iv) transmitted by telecopy (followed, in the case of any notice from the Agent or a Lender to the Borrower, pursuant to any of Sections 11.2(a), 11.2(b) or 11.3, by a notice transmitted by registered mail, postage prepaid), in each case addressed to the party to whom notice is being given at its address as set forth by its signature below, or, if telecopied, transmitted to that party at its telecopier number set forth by its signature below; or, as to each party, at such other address or telecopier number as may hereafter be designated in a notice by that party to the other party complying with the terms of this Section. All such notices or other communications shall be deemed to have been given on (i) the date received if delivered personally, by mail, or by Federal Express or similar expedited delivery service, or (ii) the date of transmission if delivered by telecopy, except that notices or requests to the Agent or any Lender pursuant to any of the provisions of Article II shall not be effective until received. Section 13.4 Costs and Expenses. The Borrower agrees to pay on ------------------- demand (i) all costs and expenses incurred by the Agent in connection with the negotiation, preparation, execution, administration or amendment of the Loan Documents and the other instruments and documents to be delivered hereunder and thereunder, including the reasonable fees and out-of-pocket expenses of counsel for the Agent with respect thereto, whether paid to outside counsel or allocated by in-house counsel, and (ii) all costs and expenses incurred by the Agent or any Lender in connection with the enforcement of the Loan Documents, including the reasonable fees and out-of-pocket expenses of counsel for the Agent or any Lender with respect thereto, whether paid to outside counsel or allocated by in-house counsel. Section 13.5 Indemnification by Borrower. The Borrower hereby ---------------------------- agrees to indemnify the Agent and the Lenders and each officer, director, employee and agent thereof (herein individually each called an "Indemnitee" and collectively called the "Indemnitees") from and against any and all losses, claims, damages, reasonable expenses (including, without limitation, reasonable attorneys' fees) and liabilities (all of the foregoing being herein called the "Indemnified Liabilities") incurred by an Indemnitee in connection with or arising out of the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the use of the proceeds of any Advance (including but not limited to any such loss, claim, damage, expense or liability arising out of any claim in which it is alleged that any "Environmental Law" has been breached with respect to any activity or property of the Borrower), except for any portion of such losses, claims, damages, expenses or liabilities incurred solely as a result of the gross negligence or willful misconduct of the applicable Indemnitee or the breach of this Agreement or any other Loan Document by that Indemnitee. "Environmental Law" shall mean (i) any federal, state or local law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, legal doctrine, order, directive, executive or administrative order, judgment, decree, injunction, legal requirement or agreement with any governmental entity relating to (A) the protection, preservation or restoration of the environment (which includes, without limitation, air, water vapor, surface water, groundwater, drinking water supply, structures, soil, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety as it relates to hazardous materials, or (B) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of, hazardous materials, in each case as amended and as now in effect, including, without limitation, the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Water Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976 (including, but not limited to, the Hazardous and Solid Waste Amendments thereto and Subtitle I relating to underground storage tanks), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act of 1970 as it relates to hazardous materials, the Federal Hazardous Substances Transportation Act, the Emergency Planning and Community Right-To-Know Act, the Safe Drinking Water Act, the Endangered Species Act, the National Environmental Policy Act, the Rivers and Harbors Appropriation Act or any so-called "Superfund" or "Superlien" law, each as amended and as now or hereafter in effect, and (ii) any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that imposes liability or obligations for injuries or damages due to, or threatened as a result of the presence of or exposure to any hazardous material. If and to the extent that the foregoing indemnity may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. All obligations provided for in this Section shall survive any termination of this Agreement. Section 13.6 Execution in Counterparts. This Agreement and the --------------------------- other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts of this Agreement or such other Loan Document, as the case may be, taken together, shall constitute but one and the same instrument. Section 13.7 Binding Effect, Assignment. The Loan Documents shall --------------------------- be binding upon and inure to the benefit of the Borrower and the Lenders and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights thereunder or any interest therein without the prior written consent of each of the Lenders. Section 13.8 Governing Law. The Loan Documents shall be governed -------------- by, and construed in accordance with, the internal laws of the State of Missouri. Section 13.9 Consent to Jurisdiction/Jury Waiver. The Borrower and ----------------------------------- the Lenders each irrevocably (i) agree that any suit, action or other legal proceeding arising out of or relating to this Agreement or any other Loan Document may be brought in a court of record in Hennepin County in the State of Minnesota or in the Courts of the United States located in such State, (ii) consent to the jurisdiction of each such court in any suit, action or proceeding, (iii) waive any objection which they may have to the laying of venue of any such suit, action or proceeding in any such courts and any claim that any such suit, action or proceeding has been brought in an inconvenient forum, and (iv) agree that a final judgment in any such suit, action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. The Borrower and Lender each waives the right to a trial by jury in any action based on or pertaining to this Agreement. Section 13.10 Severability of Provisions. Any provision of this ---------------------------- Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 13.11 Prior Agreements. This Agreement and the other Loan ----------------- Documents and related documents described herein restate and supersede in their entirety any and all prior agreements and understandings, oral or written, between any of the Lenders and the Borrower. Section 13.12 Headings. Article and Section headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 13.13 No Oral Agreements. ORAL AGREEMENTS OR COMMITMENTS TO ------------------ LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE, REGARDLESS OF LEGAL THEORY UPON WHICH IT IS BASED THAT IS IN ANY WAY RELATED TO THIS AGREEMENT. TO PROTECT YOU (BORROWER) AND US (LENDERS AND AGENT) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT. [The balance of this page is intentionally left blank.] IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. Address: FIRST BANKS, INC. 600 James S. McDonnell Blvd. Mail Code M1-199-014 Hazelwood, MO 63042 Attention: Allen H. Blake By /s/ Allen H. Blake -------------------------------- Telecopier: (314) 592-6621 Its President and Chief Executive Officer ------------------------------- (Signature Page to Secured Credit Agreement Page 1 of 9) Address: WELLS FARGO BANK, NATIONAL MAC N2650-140 ASSOCIATION, as Agent 120 S. Central Avenue, 14th Floor St. Louis, Missouri 63105-1705 Attention: Holly Heidtbrink Telecopier: (314)-726-3173 By /s/ Holly Heidtbrink -------------------------------- Its Vice President ------------------------------- (Signature Page to Secured Credit Agreement Page 2 of 9) Address: WELLS FARGO BANK, NATIONAL MAC N2650-140 ASSOCIATION, as a Lender 120 S. Central Avenue, 14th Floor St. Louis, Missouri 63105-1705 Attention: Holly Heidtbrink Telecopier: (314)-726-3173 By /s/ Holly Heidtbrink -------------------------------- Its Vice President ------------------------------- Commitment Amount: $32,500,000 Percentage: 26.530612% (Signature Page to Secured Credit Agreement Page 3 of 9) Address: JP MORGAN CHASE BANK, N.A. WI1-2031 111 East Wisconsin Avenue Milwaukee, WI 53201-2033 Attention: Douglas A. Gallun, Jr. Telecopier: (312) 661-9511 By /s/ Douglas A. Gallun, Jr. -------------------------------- Its Senior Vice President ------------------------------- Commitment Amount: $17,500,000 Percentage: 14.285714% (Signature Page to Secured Credit Agreement Page 4 of 9) Address: LASALLE BANK NATIONAL ASSOCIATION One North Brentwood, Suite 950 Clayton, Missouri 63105 Attention: Robert J. Mathias By /s/ Robert J. Mathias Telecopier: (314) 621-1612 -------------------------------- Its Senior Banker ------------------------------- Commitment Amount: $17,500,000 Percentage: 14.285714% (Signature Page to Secured Credit Agreement Page 5 of 9) Address: THE NORTHERN TRUST COMPANY 50 South LaSalle Street, L-8 Chicago, Illinois 60675 Attention: Lisa McDermott Telecopier: (312) 444-2336 By /s/ Lisa McDermott -------------------------------- Its Vice President ------------------------------- Commitment Amount: $10,000,000 Percentage: 8.163265% (Signature Page to Secured Credit Agreement Page 6 of 9) Address: UNION BANK OF CALIFORNIA, N.A. 445 South Figureroa Street Los Angeles, California 90071 Attention: Dennis A. Cattell Telecopier: (213) 236-5548 By /s/ Dennis A. Cattell -------------------------------- Its Vice President ------------------------------- Commitment Amount: $15,000,000 Percentage: 12.244898% (Signature Page to Secured Credit Agreement Page 7 of 9) Address: FIFTH THIRD BANK (CHICAGO) 1701 Gold Road Tower One, Suite 700 Rolling Meadows, IL 60008 Attention: Patrick A. Horne Telecopier: (847) 354-7130 By /s/ Patrick A. Horne -------------------------------- Its Vice President ------------------------------- Commitment Amount: $12,500,000 Percentage: 10.204082% (Signature Page to Secured Credit Agreement Page 8 of 9) Address: U.S. BANK NATIONAL ASSOCIATION Correspondent Banking SL-TW-11SI 7th & Washington St. Louis, MO 63101 Attention: David C. Buettner, VP Telecopier: (314) 418-8394 By /s/ David C. Buettner -------------------------------- Its Vice President ------------------------------- Commitment Amount: $17,500,000 Percentage: 14.285714% (Signature Page to Secured Credit Agreement Page 9 of 9) EXHIBIT A BORROWER PLEDGE AGREEMENT This Agreement is made as of the ____ day of August, 2005, by and between FIRST BANKS, INC., a Missouri Corporation ("Debtor") and WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association, as Agent for the "Lenders" pursuant to the Secured Credit Agreement described below ("Secured Party"). RECITALS Debtor, Secured Party and certain financial institutions have executed an Amended and Restated Secured Credit Agreement dated as of August 11, 2005, (the "Credit Agreement"), pursuant to which such financial institutions (the "Lenders") have agreed to lend up to $115,000,000 to Debtor and pursuant to which Secured Party has agreed to issue up to $7,500,000 in face amount of standby letters of credit for the account of Debtor. One condition to the Lenders' and Secured Party's commitments under the Credit Agreement is that Debtor execute, deliver and perform this Collateral Pledge Agreement, thereby granting a security interest to Secured Party, as agent for the Lenders, in the Collateral described herein. Now, therefore, in consideration of the premises and the mutual agreements herein set forth, the parties hereto hereby agree as follows: 1. Security Interest and Collateral. To secure the prompt and complete payment and performance of the "Obligations," as such term is defined in the Credit Agreement, Debtor hereby grants Secured Party (for its own account and as agent for the Lenders) a security interest (the "Security Interest") in (i) all of the capital stock of The San Francisco Company, a Delaware corporation, owned by Debtor, (ii) any capital stock that Debtor may hereafter acquire and deliver to Secured Party pursuant to Section 8.8 of the Credit Agreement, and (iii) all proceeds of such capital stock and all other rights in connection with such property (collectively the "Collateral"). 2. Representations, Warranties and Covenants. Debtor represents, warrants and covenants that: (a) Debtor will join with Secured Party in taking any action required by Secured Party in order to perfect the Security Interest and to protect the rights and priorities of Secured Party with respect to the Collateral. To that end, Debtor has delivered to Secured Party certificates representing all of the shares of capital stock constituting Collateral and executed and delivered one blank stock power for each such certificate. Debtor will, at Secured Party's request at any one or more times (i) duly endorse, in blank, each and every additional security certificate and instrument constituting Collateral by signing on such certificate or instrument or by signing a separate document of assignment or transfer and deliver to Secured Party each and every such additional security certificate and instrument; (ii) join with Secured Party in executing any instructions or agreements with securities intermediaries for the purpose of obtaining control of any investment property that may hereafter constitute Collateral; and (iii) instruct the issuer of any security that may hereafter constitute Collateral to register such security in the name of Secured Party. (b) Debtor is the owner of the Collateral free and clear of all liens, encumbrances, security interests and restrictions except the Security Interest and any restrictive legend appearing on any security certificate or any instrument constituting Collateral. (c) Debtor will keep the Collateral free and clear of all liens, encumbrances and security interests, except the Security Interest. (d) Debtor will pay, when due, all taxes and other governmental charges levied or assessed upon or against any Collateral. (e) Debtor will upon receipt deliver to Secured Party all investment property distributed on account of Collateral, such as stock dividends and securities resulting from stock splits, reorganizations and recapitalizations. The Security Interest shall attach to all such proceeds. 3. Events of Default. The occurrence of any Event of Default under the Credit Agreement shall be an Event of Default hereunder. 4. Remedies Upon Event of Default. Upon the occurrence of an Event of Default and during the continuance thereof, Secured Party may exercise any one or more of the rights and remedies specified in the Credit Agreement, and also any one or more of the following rights or remedies: (i) notify the obligor on or issuer of any Collateral or any securities intermediary to make payment to Secured Party of any amounts due or distributable on any Collateral, (ii) in Debtor's name or Secured Party's name enforce collection of any Collateral by suit or otherwise, or surrender, release or exchange all or any part of it, or compromise, extend or renew for any period any obligation evidenced by the Collateral, (iii) receive and keep in its possession or under its control subject to the Security Interest all proceeds of Collateral, except that any money received from the Collateral may, at Secured Party's option, be applied in reduction of the Obligations; (iv) exercise all voting and other rights as a holder of any Collateral; (v) exercise and enforce any or all rights and remedies available upon default to a secured party under the Uniform Commercial Code, including the right to (A) order any securities intermediary to sell any Collateral on any established market or over the counter or to cause any Collateral to be redeemed; (B) give any transfer or redemption order to any issuer of Collateral; or (C) offer and sell Collateral privately to purchasers who will agree to take the Collateral for investment and not with a view to distribution and who will agree to the imposition of restrictive legends on any certificates representing Collateral, and the right to arrange for a sale which would otherwise qualify as exempt from registration under the Securities Act of 1933; and if notice to Debtor of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given at least 10 calendar days prior to the date of intended disposition or other action; and (vi) exercise or enforce any or all other rights or remedies available to Secured Party by law or agreement against any Collateral, against Debtor or against any other person or property. 5. Secured Party's Duties. Secured Party's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if Secured Party exercises reasonable care in physically safekeeping such Collateral, or in the case of Collateral in the custody or possession of a securities intermediary or other third person, exercises reasonable care in the selection of the securities intermediary or other third person and Secured Party need not otherwise preserve, protect, insure or care for any Collateral. Secured Party shall not be obligated to preserve any rights Debtor may have against prior parties, to exercise at all or in any particular manner any voting rights which may be available with respect to any Collateral, to realize on the Collateral at all or in any particular manner or order, or to apply any cash proceeds of Collateral in any particular order of application. Regardless of the manner in which Secured Party chooses to exercise control over Collateral (whether by possession, by agreement with an issuer or Securities Intermediary, by transferring security entitlements into its own account, or otherwise), Secured Party shall not be deemed to be under any obligation to Debtor, whether as fiduciary, trustee, agent or otherwise, except the duty of good faith, the duties specifically imposed upon Secured Party by this Agreement, and the duties imposed upon it as a secured party by Articles 1, 8 and 9 of the Uniform Commercial Code, as in effect in Missouri. 6. Miscellaneous. Any disposition of Collateral in the manner provided in Section 4 shall be deemed commercially reasonable. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by Secured Party. A waiver signed by Secured Party shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of Secured Party's rights or remedies. All rights and remedies of Secured Party shall be cumulative and may be exercised singularly or concurrently, at Secured Party's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. All notices to be given to Debtor shall be deemed sufficiently given if delivered or mailed by registered or certified mail, postage prepaid, to Debtor at the address set forth following its signature on the signature page of this Agreement or at the most recent address shown on Secured Party's records. Debtor will reimburse Secured Party for all expenses (including reasonable attorneys' fees and legal expenses) incurred by Secured Party in the protection, defense or enforcement of the Security Interest, including expenses incurred in any litigation or bankruptcy or insolvency proceedings. This Agreement shall be binding upon and inure to the benefit of Debtor and Secured Party and their successors and assigns and shall take effect when signed by Debtor and delivered to Secured Party, and Debtor waives notice of Secured Party's acceptance hereof. This Agreement shall be governed by the internal laws of Missouri and, unless the context otherwise requires, all terms used herein which are defined in Articles 1, 8 and 9 of the Uniform Commercial Code, as in effect in Missouri, shall have the meanings therein stated. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. IN WITNESS WHEREOF, Debtor has executed this Agreement as of the day first above written. FIRST BANKS, INC. By --------------------------------- Its ------------------------------- Address: 600 James S. McDonnell Blvd. Mail Code M1-199-014 Hazelwood, MO 63042-2302
EXHIBIT B LOAN COMMITMENT AMOUNTS --------------------------------------------------------------------------------------------------------------------------------- Revolving Loan Term Loan Name Commitment Commitment Percentage Amount Amount Amount Notice Address --------------------------------------------------------------------------------------------------------------------------------- Wells Fargo Bank, National $3,979,592 $26,530,612 26.530612% MAC N2650-140 Association, as a Bank 120 S. Central Avenue, 14th Floor St. Louis, Missouri 63105-1705 Attention: Holly Heidtbrink Telecopier:(314)-726-3173 --------------------------------------------------------------------------------------------------------------------------------- JP Morgan Chase Bank, N.A. $2,142,857 $14,285,714 14.285714% Commercial Banking WI1-2031 111 East Wisconsin Avenue Milwaukee, WI 53201-2033 Attention: Douglas A. Gallun, Jr. Telecopier: (414) 977-6788 --------------------------------------------------------------------------------------------------------------------------------- LaSalle Bank National $2,142,857 $14,285,714 14.285714% One North Brentwood, Suite 950 Association Clayton, Missouri 63105 Attention: Robert J. Mathias Telecopier: (314) 621-1612 --------------------------------------------------------------------------------------------------------------------------------- The Northern Trust Company $1,224,490 $8,163,265 8.163265% 50 South LaSalle Street, L-8 Chicago, Illinois 60675 Attention: Thomas E. Bernhardt Telecopier: (312) 444-4906 --------------------------------------------------------------------------------------------------------------------------------- Union Bank of California, $1,836,735 $12,244,898 12.244898% 445 South Figureroa Street N.A. Los Angeles, California 90071 Attention: Dennis A. Cattell Telecopier: (213) 236-5548 --------------------------------------------------------------------------------------------------------------------------------- Fifth Third Bank (Chicago) $1,530,612 $10,204,082 10.204082% 1701 Golf Road Tower One, Suite 700 Rolling Meadows, IL 60008 Attention: Patrick A. Horne Telecopier: (847) 354-7130 --------------------------------------------------------------------------------------------------------------------------------- U.S. Bank National $2,142,857 $14,285,714 14.285714% Correspondent Banking Association SL-TW-11SI 7th & Washington St. Louis, MO 63101 Attention: David C. Buettner, VP Telecopier: (314) 418-8394 ---------------------------------------------------------------------------------------------------------------------------------
EXHIBIT C COMPLIANCE CERTIFICATE This Compliance Certificate is being submitted on this ___ day of __________________, 200__, for the quarter ending on the ___ day of __________________, 200__, pursuant to the terms of the Amended and Restated Secured Credit Agreement dated as of August ___, 2005, (the "Credit Agreement"), as the same may be thereafter amended from time to time, among Wells Fargo Bank, National Association (the "Agent"), the Lenders that are parties thereto, and First Banks, Inc., as Borrower. Capitalized terms used but not defined herein shall have the meanings set forth in the Credit Agreement. The undersigned officers of First Banks, Inc. jointly and severally certify to the Lenders that as of the date hereof: A. The representations and warranties contained in Article VII of the Credit Agreement are correct as of the date hereof, except to the extent that the same relate specifically to an earlier date; B. No Default or Event of Default has occurred and is continuing; C. Attached is an accurate listing of the current Subsidiaries of First Banks, Inc.; and D. The computation of Margin and L/C Margin and compliance with the covenants contained in Article X of the Credit Agreement are supported by the following:
4.7 Funded Debt Ratio ----------------- Revolving (i) First Banks, Inc. (consolidated) (2) Ratio of Loan L/C Term Loan Net Income for the quarter ended: Funded Debt (2) to (1) Margin Margin Margin - --------------------------------- ----------- ---------- ------ ------ ------ $ - ------------- --------------- - ------------- --------------- - ------------- --------------- - ------------- --------------- Total Net Income $ (1) % bp bp bp --------------- ----------- -------- ------ ------ ------ 10.1 Total Risk Based Capital Ratio (2) Weighted-Risk Assets and Off- Minimum (1) Balance Sheet Ratio of Ratio Total Capital Items (1) to (2) Permitted ------------- ----- ---------- --------- First Banks, Inc. (consolidated) % 10.0% ----------- ----------- ---------- ----- First Bank % 10.0% ----------- ----------- ---------- ----- 10.2 Tier I Risk Based Capital Ratio ------------------------------- (2) Weighted-Risk Assets and Off- Minimum (1) Balance Sheet Ratio of Ratio Tier I Capital Items (1) to (2) Permitted -------------- ----- ---------- --------- First Banks, Inc. (consolidated) % 6.0% ------------ ----------- ---------- ---- First Bank % 6.0% ------------ ----------- ---------- ---- 10.3 Leverage Ratio -------------- (1) (2) Tier I Capital Average Total Ratio of Minimum -------------- ------------- (1) to (2) Ratio Assets ---------- Permitted ------ --------- First Banks, Inc. (consolidated) % 5.0% ------------ ----------- ---------- ---- First Bank % 5.0% ------------ ----------- ---------- ---- 10.4 Minimum Return on Assets ------------------------ Minimum Net Income for the quarter ended: Average Total Ratio of Ratio - --------------------------------- Assets (2) (1) to (2) Permitted ----------- ---------- --------- First Banks, Inc. (consolidated) $ - ---------------- ------------- - ---------------- ------------- - ---------------- ------------- - ---------------- ------------- Total Net Income $ (1) % 0.70% ------------- ---------- ---------- ----- 10.5 Non-Performing Assets --------------------- (1) (2) Maximum Non-Performing Primary Equity Ratio of Ratio Assets Capital (1) to (2) Permitted ------ ------- ---------- --------- First Banks, Inc. (consolidated) % 20% ------------ ------- ---------- --- 10.6 Allowance for Loan and Lease Losses ----------------------------------- (1) (2) Minimum Allowance for Non-Performing Ratio of Ratio Loan and Assets (1) to (2) Permitted Lease Losses ------ ---------- --------- First Banks, Inc. (consolidated) % 100% ---------- -------- ---------- ----
Signed as of the day and year first above written. FIRST BANKS, INC. By: --------------------------------------------------------- Chief Executive Officer and Chief Financial Officer By: --------------------------------------------------------- Senior Vice President - Chief Accounting Officer By: --------------------------------------------------------- Chief Operating Officer By: --------------------------------------------------------- Chief Credit Officer
EXHIBIT D1 APPLICATION FOR STANDBY LETTER OF CREDIT TO: WELLS FARGO BANK, NATIONAL ASSOCIATION - ------------------------------------------------------------------------------------------------------------------ ------------------- -------------------------------------------------------------------------------- FOR WELLS FARGO'S DATE USE ONLY LETTER OF CREDIT NO. DOCUMENT TRACK NO. ------------------- -------------------------------------------------------------------------------- APPLICANT SIGNING BELOW HEREBY REQUESTS THAT WELLS FARGO BANK, NATIONAL ASSOCIATION ("WELLS FARGO") ISSUE IN WELLS FARGO'S NAME AN IRREVOCABLE STANDBY LETTER OF CREDIT (THE "CREDIT") ON SUBSTANTIALLY THE TERMS BELOW AND, UNLESS OTHERWISE SPECIFIED BELOW IN SPECIAL INSTRUCTIONS, FORWARD THE CREDIT BY THE FOLLOWING MEANS TO THE BENEFICIARY DIRECTLY OR THROUGH A BANK SELECTED BY WELLS FARGO: ( ) FULL CABLE/TELEX ( ) COURIER ( ) MAIL WITH BRIEF ADVICE BY CABLE/TELEX ( ) MAIL ( ) OTHER: ------------------- - ------------------------------------------------------------------------------------------------------------------ ADVISING BANK: (If left blank, Wells Fargo may select) BENEFICIARY: (Name and Address) - ------------------------------------------------------------------------------------------------------------------ PARTY TO BE NAMED AS REQUESTING THE CREDIT: (Name AMOUNT: (In words) and Address) ----------------------------- ---------------------- (In figures) (Currency) - ------------------------------------------------------------------------------------------- ---------------------- AVAILABILITY: Unless otherwise specified herein, the Credit is to EXPIRATION DATE: be available with Wells Fargo's issuing office by payment of draft(s) ------------------------- drawn at sight on Wells Fargo or, at Wells Fargo's option, with any PLACE OF EXPIRATION: Unless otherwise option, with any bank(s) or with a bank nominated by Wells Fargo by specified herein, the Credit is to negotiation of draft(s) drawn at sight on Wells Fargo. expire at Wells Fargo's issuing office or, if the Credit is available with any bank(s) or with a specific bank other than Wells Fargo's issuing office, at such place as Wells Fargo shall elect. - ------------------------------------------------------------------------------------------------------------------ DOCUMENT(S): Draft(s) are to be accompanied by: (Attached additional signed sheet(s), if necessary, and label as attachments to this Application.) - ------------------------------------------------------------------------------------------------------------------ DRAWING(S): ( ) Partial drawings are permitted. (More than one draft may be drawn and presented under the Credit.) ( ) Only one draft may be drawn and presented under the Credit, and: ( ) the draft must be for the full amount of the Credit. ( ) the draft may be for less than the full amount of the Credit. - ------------------------------------------------------------------------------------------------------------------ SPECIAL INSTRUCTIONS: (Attach additional signed sheet(s), if necessary, and label as attachments to this Application.) - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ TRANSFERABILITY: (If not checked, the Credit will not be transferable.) ( ) The Credit is to be transferable, with transfer charges for: ( ) Applicant's account ( ) Beneficiary's account - ------------------------------------------------------------------------------------------------------------------ INQUIRIES: Direct to: Telephone Number: - ------------------------------------------------------------------------------------------------------------------ APPLICANT'S AGREEMENT AND SIGNATURE: Applicant's signature here indicates agreement to all the terms and conditions on this Application and Applicant's agreement that the Credit and its issuance will be governed by (1) the terms and conditions of the Standby Letter of Credit Agreement between Applicant and Wells Fargo and/or (2) any other agreement signed by Applicant pursuant to which the Credit is to be issued. This Application is signed by Applicant's duly authorized representative(s) on the date specified above. - -------------------------------------------------------------------------------- ------------------------------- APPLICANT ADDRESS - ------------------------------------------------ ----------------------------- ------------------------------- AUTHORIZED SIGNATURE TITLE ADDRESS - ------------------------------------------------ ----------------------------- ------------------------------- AUTHORIZED SIGNATURE TITLE ADDRESS - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- (TO BE COMPLETED BY WELLS FARGO BANK, NATIONAL ASSOCIATION) CREDIT ISSUANCE HAS BEEN APPROVED IN ACCORDANCE WITH WELLS FARGO'S CREDIT POLICIES AND PROCEDURES - ----------------------------------------------------------------------------------------------------------------- APPROVING OFFICER'S SIGNATURE APPROVING OFFICER'S NAME (Print) APPROVING OFFICER'S OFFICE AU MAC COMMITMENT NO. (Print) - ------------------------------------------------------------------------------------------------------------------ PHONE AFS INTERFACE REQUIRED: STANDALONE COLLATERAL PURPOSE DATE TRANSACTION: CODE CODE YES ( ) NO ( ) YES ( ) NO ( ) - ------------------------------------------------------------------------------------------------------------------ SPECIAL INSTRUCTIONS: (Indicate any provisions applicable to the Credit different from those on Applicant's Relationship Management Instructions Form) - ------------------------------------------------------------------------------------------------------------------
EXHIBIT D2 STANDBY LETTER OF CREDIT AGREEMENT To: WELLS FARGO BANK, NATIONAL ASSOCIATION Applicant hereby requests that you, Wells Fargo Bank, National Association ("Wells Fargo"), issue in your name one or more standby letters of credit pursuant to Applications for the issuance of such Credits and the terms and conditions of this Agreement. Each Credit will be issued at Applicant's request and for its account, and, unless otherwise specifically provided in any Loan Document, at your option. Applicant agrees that the terms and conditions in this Agreement shall apply to each Application and the Credit issued pursuant to each Application, and to transactions under each Application, each Credit and this Agreement. SECTION 1. DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth after each term: "Agreement" means this --------- Standby Letter of Credit Agreement as it may be revised or amended from time to time. "Applicant" means collectively each person and/or entity signing this --------- Agreement as Applicant. "Application" means your printed form titled ----------- "Application For Standby Letter of Credit" or any other form acceptable to you on which Applicant applies for the issuance by you of a Credit and/or an application for amendment of a Credit or any combination of such applications, as the context may require. "Beneficiary" means the person or entity named on an ----------- Application as the beneficiary or any transferee of such beneficiary. "Collateral" means the Property, together with the proceeds of such Property, ---------- securing any or all of Applicant's obligations and liabilities at any time existing under or in connection with any L/C Document and/or any Loan Document. "Commission Fee" means the fee, computed at the commission fee rate specified by -------------- you or specified in any Loan Document, charged by you at the time or times specified by you on the amount of each Credit and on the amount of each increase in a Credit for the time period each Credit is outstanding. "Credit" means an ------ instrument or document titled "Irrevocable Standby Letter of Credit" or "Standby Letter of Credit", or any instrument or document whatever it is titled or whether or not it is titled functioning as a standby letter of credit, issued under or pursuant to an Application, and all renewals, extensions and amendments of such instrument or document. "Demand" means any sight draft, electronic or ------ telegraphic transmission or other written demand drawn or made, or purported to be drawn or made, under or in connection with any Credit. "Document" means any -------- instrument, statement, certificate or other document referred to in or related to any Credit or required by any Credit to be presented with any Demand. "Dollars" means the lawful currency at any time for the payment of public or ------- private debts in the United States of America. "Event of Default" means any of ---------------- the events set forth in Section 13 of this Agreement. "Expiration Date" means ---------------- the date any Credit expires. "Guarantor" means any person or entity guaranteeing --------- the payment and/or performance of any or all of Applicant's obligations under or in connection with any L/C Document and/or any Loan Document. "Holding Company" --------------- means any company or other entity directly or indirectly controlling you. "L/C --- Document" means this Agreement, each Application, each Credit, and each Demand. - -------- "Loan Document" means each and any promissory note, loan agreement, security -------------- agreement, pledge agreement, guarantee or other agreement or document executed in connection with, or relating to, any extension of credit under which any Credit is issued. "Maximum Rate" means the maximum amount of interest (as ------------- defined by applicable laws), if any, permitted to be paid, taken, reserved, received, collected or charged under applicable laws, as the same may be amended or modified from time to time. "Negotiation Fee" means the fee, computed at the --------------- negotiation fee rate specified by you or specified in any Loan Document, charged by you on the amount of each Demand paid by you or any other bank specified by you when each Demand is paid. "Payment Office" means the office specified by you -------------- or specified in any Loan Document as the office where reimbursements and other payments under or in connection with any L/C Document are to be made by Applicant. "Prime Rate" means the rate of interest most recently announced ----------- within Wells Fargo at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Wells Fargo's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate. "Property" means all forms of property, whether tangible or -------- intangible, real, personal or mixed. "Rate of Exchange" means Wells Fargo's then ---------------- current selling rate of exchange in San Francisco, California for sales of the currency of payment of any Demand, or of any fees or expenses or other amounts payable under this Agreement, for cable transfer to the country of which such currency is the legal tender. "UCP" means the Uniform Customs and Practice for --- Documentary Credits, an International Chamber of Commerce publication, or any substitution therefor or replacement thereof. "Unpaid and Undrawn Balance" means -------------------------- at any time the entire amount which has not been paid by you under all the Credits issued for Applicant's account, including, without limitation, the amount of each Demand on which you have not yet effected payment as well as the amount undrawn under all such Credits. "Wells Fargo & Company" means Wells Fargo --------------------- & Company, a Delaware corporation. SECTION 2. HONORING DEMANDS AND DOCUMENTS. You may receive, accept and honor, as complying with the terms of any Credit, any Demand and any Documents accompanying such Demand, provided that such Demand and accompanying Documents appear on their face to comply substantially with the provisions of such Credit and are, or appear on their face to be, signed or issued by (a) a person or entity authorized under such Credit to draw, sign or issue such Demand and accompanying Documents, or (b) an administrator, executor, trustee in bankruptcy, debtor in possession, assignee for the benefit of creditors, liquidator, receiver or other legal representative or successor in interest by operation of law of any such person or entity. SECTION 3. REIMBURSEMENT FOR PAYMENT OF DEMANDS. Applicant shall reimburse you for all amounts paid by you on each Demand, including, without limitation, all such amounts paid by you to any paying, negotiating or other bank. If in connection with the issuance of any Credit, you agree to pay any other bank the amount of any payment or negotiation made by such other bank under such Credit upon your receipt of a cable, telex or other written telecommunication advising you of such payment or negotiation, or authorize any other bank to debit your account for the amount of such payment or negotiation, Applicant agrees to reimburse you for all such amounts paid by you, or debited to your account with such other bank, even if any Demand or Document specified in such Credit fails to arrive in whole or in part or if, upon the arrival of any such Demand or Document, the terms of such Credit have not been complied with or such Demand or Document does not conform to the requirements of such Credit or is not otherwise in order. SECTION 4. FEES AND EXPENSES. Applicant agrees to pay to you (a) all Commission Fees, Negotiation Fees, cable fees, amendment fees, non-usance fees, and cancellation fees of, and all out-of-pocket expenses incurred by, you under or in connection with any L/C Document, and (b) all fees and charges of banks or other entities other than you under or in connection with any L/C Document if any Application (i) does not indicate who will pay such fees and charges, (ii) indicates that such fees and charges are to be paid by Applicant, or (iii) indicates that such fees and charges are to be paid by the Beneficiary and the Beneficiary does not, for any reason whatsoever, pay such fees or charges. There shall be no refund of any portion of any Commission Fee in the event any Credit is used, reduced, amended, modified or terminated before its Expiration Date. SECTION 5. DEFAULT INTEREST. Unless otherwise specified in any Loan Document, or on an Application and agreed to by you, all amounts to be reimbursed by Applicant to you, and all fees and expenses to be paid by Applicant to you, and all other amounts due from Applicant to you under or in connection with any L/C Documents, will bear interest (to the extent permitted by law), payable on demand, from the date you paid the amounts to be reimbursed or the date such fees, expenses and other amounts were due until such amounts are paid in full, at a rate per annum (computed on the basis of a 360-day year, actual days elapsed) which is the lesser of (a) two percent (2%) above the Prime Rate in effect from time to time, or (b) the Maximum Rate. SECTION 6. TIME AND METHOD OF REIMBURSEMENT AND PAYMENT. Unless otherwise specified in this Section, in any Loan Document, or on an Application and agreed to by you, all amounts to be reimbursed by Applicant to you, all fees and expenses to be paid by Applicant to you, and all interest and other amounts due to you from Applicant under or in connection with any L/C Documents will be reimbursed or paid at the Payment Office in Dollars in immediately available funds without setoff or counterclaim (i) on demand or, (ii) at your option by your debiting any of Applicant's accounts with you, with each such debit being made without presentment, protest, demand for reimbursement or payment, notice of dishonor or any other notice whatsoever, all of which are hereby expressly waived by Applicant. Each such debit will be made at the time each Demand is paid by you or, if earlier, at the time each amount is paid by you to any paying, negotiating or other bank, or at the time each fee and expense is to be paid or any interest or other amount is due under or in connection with any L/C Documents. If any Demand or any fee, expense, interest or other amount payable under or in connection with any L/C Documents is payable in a currency other than Dollars, Applicant agrees to reimburse you for all amounts paid by you on such Demand, and/or to pay you all such fees, expenses, interest and other amounts, in one of the three following ways, as determined by you in your sole discretion in each case: (a) at such place as you shall direct, in such other currency; or (b) at the Payment Office in the Dollar equivalent of the amount of such other currency calculated at the Rate of Exchange on the date determined by you in your sole discretion; or (c) at the Payment Office in the Dollar equivalent, as determined by you (which determination shall be deemed correct absent manifest error), of such fees, expenses, interest or other amounts or of the actual cost to you of paying such Demand. Applicant assumes all political, economic and other risks of disruptions or interruptions in any currency exchange. SECTION 7. AGREEMENTS OF APPLICANT. Applicant agrees that (a) unless otherwise specifically provided in any Loan Document, you shall not be obligated at any time to issue any Credit for Applicant's account; (b) unless otherwise specifically provided in any Loan Document, if any Credit is issued by you for Applicant's account, you shall not be obligated to issue any further Credit for Applicant's account or to make other extensions of credit to Applicant or in any other manner to extend any financial consideration to Applicant; (c) you have not given Applicant any legal or other advice with regard to any L/C Document or Loan Document; (d) if you at any time discuss with Applicant the wording for any Credit, any such discussion will not constitute legal or other advice by you or any representation or warranty by you that any wording or Credit will satisfy Applicant's needs; (e) Applicant is responsible for the wording of each Credit, including, without limitation, any drawing conditions, and will not rely on you in any way in connection with the wording of any Credit or the structuring of any transaction related to any Credit; (f) Applicant, and not you, is responsible for entering into the contracts relating to the Credits between Applicant and the Beneficiaries and for causing Credits to be issued; (g) you may, as you deem appropriate, modify or alter and use in any Credit the terminology contained on the Application for such Credit; (h) unless the Application for a Credit specifies whether the Documents to be presented with a Demand under such Credit must be sent to you in one parcel or in two parcels or may be sent to you in any number of parcels, you may, if you so desire, make such determination and specify in the Credit whether such Documents must be sent in one parcel or two parcels or may be sent in any number of parcels; (i) you shall not be deemed Applicant's agent or the agent of any Beneficiary or any other user of any Credit, and neither Applicant, nor any Beneficiary nor any other user of any Credit shall be deemed your agent; (j) Applicant will promptly examine all Documents and each Credit if and when they are delivered to Applicant and, in the event of any claim of noncompliance of any Documents or any Credit with Applicant's instructions or any Application, or in the event of any other irregularity, Applicant will promptly notify you in writing of such noncompliance or irregularity; (k) all directions and correspondence relating to any L/C Document are to be sent at Applicant's risk; (l) if any Credit has a provision concerning the automatic extension of its Expiration Date, you may, at your sole option, give notice of nonrenewal of such Credit and if Applicant does not at any time want such Credit to be renewed Applicant will so notify you at least fifteen (15) calendar days before you are to notify the Beneficiary of such Credit or any advising bank of such nonrenewal pursuant to the terms of such Credit; (m) Applicant will not seek to obtain, apply for, or acquiesce in any temporary or permanent restraining order, preliminary or permanent injunction, permanent injunction or any other pretrial or permanent injunctive or similar relief, restraining, prohibiting or enjoining you, any of your correspondents or any advising, confirming, negotiating, paying or other bank from paying or negotiating any Demand or honoring any other obligation under or in connection with any Credit; and (n) except for Applicant's obligations specifically affected by the actions referred to in subsection (vi) of this Section 7(n), Applicant's obligations under or in connection with each L/C Document and Loan Document shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of each such L/C Document and Loan Document under all circumstances whatsoever, including, without limitation, the following circumstances, the circumstances listed in Section 12(b) through (dd) of this Agreement, and any other event or circumstance similar to such circumstances: (A) any lack of validity or enforceability of any L/C Document, any Loan Document, any Document or any agreement relating to any of the foregoing; (B) any amendment of or waiver relating to, or any consent to or departure from, any L/C Document, any Loan Document or any Document; (C) any release or substitution at any time of any Property held as Collateral; (D) your failure to deliver to Applicant any Document you have received with a drawing under a Credit because doing so would, or is likely to, violate any law, rule or regulation of any government authority; (E) the existence of any claim, set-off, defense or other right which Applicant may have at any time against you or any Beneficiary (or any person or entity for whom any Beneficiary may be acting) or any other person or entity, whether under or in connection with any L/C Document, any Loan Document, any Document or any Property referred to in or related to any of the foregoing or under or in connection with any unrelated transaction; (F) any breach of contract or other dispute between or among any two or more of you, Applicant, any Beneficiary, any transferee of any Beneficiary, any person or entity for whom any Beneficiary or any transferee of any Beneficiary may be acting, or any other person or entity; or (G) any delay, extension of time, renewal, compromise or other indulgence granted or agreed to by you with or without notice to Applicant, or Applicant's approval, in respect of any of Applicant's indebtedness or other obligations to you under or in connection with any L/C Document or any Loan Document. SECTION 8. COMPLIANCE WITH LAWS AND REGULATIONS. Applicant represents and warrants to you that no Application, Credit or transaction under any Application and/or Credit will contravene any law or regulation of the government of the United States or any state thereof. Applicant agrees (a) to comply with all federal, state and foreign exchange regulations and other government laws and regulations now or hereafter applicable to any L/C Document, to any payments under or in connection with any L/C Document, to each transaction under or in connection with any L/C Document, or to the import, export, shipping or financing of the Property referred to in or shipped under or in connection with any Credit, and (b) to reimburse you for such amounts as you may be required to expend as a result of such laws or regulations, or any change therein or in the interpretation thereof by any court or administrative or government authority charged with the administration of such laws or regulations. SECTION 9. TAXES, RESERVES AND CAPITAL ADEQUACY REQUIREMENTS. In addition to, and notwithstanding any other provision of any L/C Document or any Loan Document, in the event that any law, treaty, rule, regulation, guideline, request, order, directive or determination (whether or not having the force of law) of or from any government authority, including, without limitation, any court, central bank or government regulatory authority, or any change therein or in the interpretation or application thereof, (a) does or shall subject you to any tax of any kind whatsoever with respect to the L/C Documents, or change the basis of taxation of payments to you of any amount payable thereunder (except for changes in the rate of tax on your net income); (b) does or shall impose, modify or hold applicable any reserve, special deposit, assessment, compulsory loan, Federal Deposit Insurance Corporation insurance or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, other credit extended by or any other acquisition of funds by, any of your offices; (c) does or shall impose, modify or hold applicable any capital adequacy requirements (whether or not having the force of law); or (d) does or shall impose on you any other condition; and the result of any of the foregoing is (i) to increase the cost to you of issuing or maintaining any Credit or of performing any transaction under any L/C Document, (ii) to reduce any amount receivable by you under any L/C Document, or (iii) to reduce the rate of return on your capital or the capital of the Holding Company to a level below that which you or the Holding Company could have achieved but for any imposition, modification or application of any capital adequacy requirement (taking into consideration your policy and the policy of the Holding Company, as the case may be, with respect to capital adequacy), and any such increase or reduction is material (as determined by you or the Holding Company, as the case may be, in your or the Holding Company's sole discretion); then, in any such case, Applicant agrees to pay to you or the Holding Company, as the case may be, such amount or amounts as may be necessary to compensate you or the Holding Company for (A) any such additional cost, (B) any reduction in the amount received by you under any L/C Document, or (C) to the extent allocable (as determined by you or the Holding Company, as the case may be, in your or the Holding Company's sole discretion) to any L/C Document, any reduction in the rate of return on your capital or the capital of the Holding Company. SECTION 10. COLLATERAL. In addition to, and not in substitution for, any Property delivered, conveyed, transferred or assigned to you under any Loan Document as security for any or all of Applicant's obligations and liabilities to you at any time existing under or in connection with any L/C Document or any Loan Document, Applicant grants to you a security interest in and to the following Collateral, whether or not any such Collateral is in your possession or control or the possession or control of your agents or correspondents or in transit to, or set apart for, you or your agents or correspondents, until such time as all Applicant's obligations and liabilities to you at any time existing under or in connection with each L/C Document and each Loan Document have been fully paid and discharged, all as security for such obligations and liabilities, (a) all Applicant's property, claims, demands, right, title and interest in and to the balance of each of Applicant's deposit accounts with you now or at any time hereafter existing, and all evidences of such deposit accounts, (b) all Property belonging to Applicant or in which it may have an interest, now or at any time hereafter delivered, conveyed, transferred, assigned, pledged or paid to you or your agents or correspondents in any manner whatsoever, whether as security or for safekeeping or otherwise, including, without limitation, any items received for collection or transmission, and the proceeds of such items, whether or not such Property is in whole or in part released to Applicant on trust or bailee receipt or otherwise, and (c) where Applicant is more than one person or entity, all right, title and interest of each of Applicants in and to all the Property which any of Applicants may now or hereafter obtain as security for the obligations of any one or more of Applicants to one or more of the others of Applicants arising under or in connection with the transaction to which any Credit relates. Further, in addition to, and not in substitution for, any Property delivered, conveyed, transferred or assigned to you under any Loan Document as security for any or all of Applicant's obligations and liabilities to you at any time existing under or in connection with any L/C Document or any Loan Document, Applicant agrees to deliver, convey, transfer and assign to you on demand, as security, Property of a value and character satisfactory to you, (i) if you at any time feel insecure about Applicant's ability or willingness to repay any amounts which you have paid or may pay in the future on any Demand or in honoring any other of your obligations under or in connection with any Credit, or (ii) without limiting the generality of the foregoing, if any temporary or permanent restraining order, preliminary or permanent injunction, or any other pretrial or permanent injunctive or similar relief is obtained restraining, prohibiting or enjoining you, any of your correspondents, or any advising, confirming, negotiating, paying or other bank from paying or negotiating any Demand or honoring any other obligation under or in connection with any Credit. Applicant agrees that the receipt by you or any of your agents or correspondents at any time of any kind of security, including, without limitation, cash, shall not be deemed a waiver of any of your rights or powers under this Agreement. Applicant agrees to sign and deliver to you on demand, all such deeds of trust, security agreements, financing statements and other documents as you shall at any time request which are necessary or desirable (in your sole opinion) to grant to you an effective and perfected security interest in and to any or all of the Collateral. Applicant agrees to pay all filing and recording fees related to the perfection of any security interest granted to you in accordance with this Section. Applicant hereby agrees that any or all of the Collateral may be held and disposed of as provided in this Agreement by you. Upon any transfer, sale, delivery, surrender or endorsement of any Document or Property which is or was part of the Collateral, Applicant will indemnify and hold you and your agents and correspondents harmless from and against each and every claim, demand, action or suit which may arise against you or any of your agents or correspondents by reason of such transfer, sale, delivery, surrender or endorsement. SECTION 11. INDEMNIFICATION. Except to the extent caused by your lack of good faith, and notwithstanding any other provision of this Agreement, Applicant agrees to reimburse and indemnify you for (a) all amounts paid by you to any Beneficiary under or in connection with any guarantee or similar undertaking issued by such Beneficiary to a third party at Applicant's request, whether such request is communicated directly by Applicant or through you to such Beneficiary; and (b) all damages, losses, liabilities, actions, claims, suits, penalties, judgments, obligations, costs or expenses, of any kind whatsoever and howsoever caused, including, without limitation, attorneys' fees and interest, paid, suffered or incurred by, or imposed upon, you directly or indirectly arising out of or in connection with (i) any L/C Document, any Loan Document, any Document or any Property referred to in or related to any Credit; (ii) Applicant's failure to comply with any of its obligations under this Agreement; (iii) the issuance of any Credit; (iv) the transfer of any Credit; (v) any guarantee or similar undertaking, or any transactions thereunder, issued by any Beneficiary to a third party at Applicant's request, whether such request is communicated directly by Applicant or through you to such Beneficiary; (vi) any communication made by you, on Applicant's instructions, to any Beneficiary requesting that such Beneficiary issue a guarantee or similar undertaking to a third party or the issuance of any such guarantee or similar undertaking; (vii) the collection of any amounts Applicant owes to you under or in connection with any L/C Document or any Loan Document; (viii) the foreclosure against, or other enforcement of, any Collateral; (ix) the protection, exercise or enforcement of your rights and remedies under or in connection with any L/C Document or any Loan Document; (x) any court decrees or orders, including, without limitation, temporary or permanent restraining orders, preliminary or permanent injunctions, or any other pretrial or permanent injunctive or similar relief, restraining, prohibiting or enjoining or seeking to restrain, prohibit or enjoin you, any of your correspondents or any advising, confirming, negotiating, paying or other bank from paying or negotiating any Demand or honoring any other obligation under or in connection with any Credit; or (xi) any Credit being governed by laws or rules other than the UCP in effect on the date such Credit is issued. The indemnity provided in this Section will survive the termination of this Agreement and the expiration or cancellation of any or all the Credits. SECTION 12. LIMITATION OF LIABILITY. Notwithstanding any other provision of this Agreement, neither you nor any of your agents or correspondents will have any liability to Applicant for any action, neglect or omission, if done in good faith, under or in connection with any L/C Document, Loan Document or Credit, including, without limitation, the issuance or any amendment of any Credit, the failure to issue or amend any Credit, or the honoring or dishonoring of any Demand under any Credit, and such good faith action, neglect or omission will bind Applicant. Notwithstanding any other provision of any L/C Document, in no event shall you or your officers or directors be liable or responsible, regardless of whether any claim is based on contract or tort, for (a) any special, consequential, indirect or incidental damages, including, without limitation, lost profits, arising out of or in connection with the issuance of any Credit or any action taken or not taken by you in connection with any L/C Document, any Loan Document, or any Document or Property referred to in or related to any Credit; (b) the honoring of any Demand in accordance with any order or directive of any court or government or regulatory body or entity requiring such honor despite any temporary restraining order, restraining order, preliminary injunction, permanent injunction or any type of pretrial or permanent injunctive relief or any similar relief, however named, restraining, prohibiting or enjoining such honor; (c) the dishonoring of any Demand in accordance with any legal or other restriction in force at the time and in the place of presentment or payment; (d) verifying the existence or reasonableness of any act or condition referenced, or any statement made, in connection with any drawing or presentment under any Credit; (e) the use which may be made of any Credit; (f) the validity of any purported transfer of any Credit or the identity of any purported transferee of any Beneficiary; (g) any acts or omissions of any Beneficiary or any other user of any Credit; (h) the form, validity, sufficiency, correctness, genuineness or legal effect of any Demand or any Document, or of any signatures or endorsements on any Demand or Document, even if any Demand or any Document should in fact prove to be in any or all respects invalid, insufficient, fraudulent or forged; (i) payment by you of any Demand when the Demand and any accompanying Documents appear on their face to comply substantially with the terms of the Credit to which they relate or dishonor by you of any Demand when the Demand and any accompanying Documents do not strictly comply on their face with the terms of the Credit to which they relate; (j) the failure of any Demand or Document to bear any reference or adequate reference to the Credit to which it relates; (k) the failure of any Document to accompany any Demand; (l) the failure of any person or entity to note the amount of any Demand on the Credit to which it relates or on any Document; (m) the failure of any person or entity to surrender or take up any Credit; (n) the failure of any Beneficiary to comply with the terms of any Credit or to meet the obligations of such Beneficiary to Applicant; (o) the failure of any person or entity to send or forward Documents if and as required by the terms of any Credit; (p) any errors, inaccuracies, omissions, interruptions or delays in transmission or delivery of any messages, directions or correspondence by mail, cable, telegraph, wireless or otherwise, whether or not they are in cipher; (q) any notice of nonrenewal of a Credit sent by you not being received on time or at any time by the Beneficiary of such Credit; (r) any inaccuracies in the translation of any messages, directions or correspondence; (s) any Beneficiary's use of the proceeds of any Demand; (t) any Beneficiary's failure to repay to you or Applicant the proceeds of any Demand if the terms of any Credit require such repayment; or (u) any act, error, neglect, default, negligence, gross negligence, omission, willful misconduct, lack of good faith, insolvency or failure in business of any of your agents or correspondents or of any advising, confirming, negotiating, paying or other bank. The occurrence of any one or more of the contingencies referred to in the preceding sentence shall not affect, impair or prevent the vesting of your rights or powers under this Agreement or any Loan Document or Applicant's obligation to make reimbursement or payment to you under this Agreement or any Loan Document. The provisions of this Section will survive the termination of this Agreement and any Loan Documents and the expiration or cancellation of any or all the Credits. SECTION 13. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: (a) Applicant's or any Guarantor's failure to pay any principal, interest, fee or other amount when due under or in connection with any L/C Document or any Loan Document; (b) Applicant's failure to deliver to you Property of a value and character satisfactory to you at any time you have demanded security from Applicant pursuant to Section 10 of this Agreement; (c) the occurrence and continuance of any default or defined event of default under any Loan Document or any other agreement, document or instrument signed or made by Applicant or any Guarantor in your favor; (d) Applicant's or any Guarantor's failure to perform or observe any term, covenant or agreement contained in this Agreement or any Loan Document (other than those referred to in subsections (a), (b) and (c) of this Section, or the breach of any other obligation owed by Applicant or any Guarantor to you, and any such failure or breach shall be impossible to remedy or shall remain unremedied for thirty (30) calendar days after such failure or breach occurs; (e) any representation, warranty or certification made or furnished by Applicant or any Guarantor under or in connection with any L/C Document, any Loan Document or any Collateral, or as an inducement to you to enter into any L/C Document or Loan Document or to accept any Collateral, shall be materially false, incorrect or incomplete when made; (f) any material provision of this Agreement or any Loan Document shall at any time for any reason cease to be valid and binding on Applicant or any Guarantor or shall be declared to be null and void, or the validity or enforceability thereof shall be contested by Applicant, any Guarantor or any government agency or authority, or Applicant or any Guarantor shall deny that it has any or further liability or obligation under this Agreement or any Loan Document; (g) Applicant's or any Guarantor's failure to pay or perform when due any indebtedness or other obligation Applicant or such Guarantor has to any person or entity other than you if such failure gives the payee of such indebtedness or the beneficiary of the performance of such obligation the right to accelerate the time of payment of such indebtedness or the performance of such obligation; (h) any guarantee of, or any security covering, any of Applicant's indebtedness to you arising under or in connection with any L/C Document or any Loan Document fails to be in full force and effect at any time; (i) any material adverse change in Applicant's or any Guarantor's financial condition; (j) Applicant or any Guarantor suspends the transaction of its usual business or is expelled or suspended from any exchange; (k) Applicant or any Guarantor dies or is incapacitated; (l) Applicant or any Guarantor dissolves or liquidates; (m) Applicant or any Guarantor is not generally paying its debts as they become due; (n) Applicant or any Guarantor becomes insolvent, however such insolvency may be evidenced, or Applicant or any Guarantor makes any general assignment for the benefit of creditors; (o) a petition is filed by or against Applicant or any Guarantor seeking Applicant's or such Guarantor's liquidation or reorganization under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, or a similar action is brought by or against Applicant or any Guarantor under any federal, state or foreign law; (p) a proceeding is instituted by or against Applicant or any Guarantor for any relief under any bankruptcy, insolvency or other law relating to the relief of debtors, reorganization, readjustment or extension of indebtedness or composition with creditors; (q) a custodian or a receiver is appointed for, or a writ or order of attachment, execution or garnishment is issued, levied or made against, any of Applicant's or any Guarantor's Property or assets; (r) an application is made by any of Applicant's or any Guarantor's judgment creditors for an order directing you to pay over money or to deliver other of Applicant's or such Guarantor's Property; or (s) any government authority or any court takes possession of any substantial part of Applicant's or any Guarantor's Property or assets or assumes control over Applicant's or any Guarantor's affairs. SECTION 14. REMEDIES. Upon the occurrence and continuance of any Event of Default all amounts paid by you on any Demand which have not previously been repaid to you, together with all interest on such amounts, and the Unpaid and Undrawn Balance, if any, shall automatically be owing by Applicant to you and shall be due and payable by Applicant on demand without presentment or any other notice of any kind, including, without limitation, notice of nonperformance, notice of protest, protest, notice of dishonor, notice of intention to accelerate, or notice of acceleration, all of which are expressly waived by Applicant. Upon payment of the Unpaid and Undrawn Balance to you Applicant shall have no further legal or equitable interest therein, and you will not be required to segregate on your books or records the Unpaid and Undrawn Balance paid by Applicant. After you receive the Unpaid and Undrawn Balance, you agree to pay to Applicant, upon termination of all of your liability under all the Credits and Demands, a sum equal to the amount which has not been drawn under all the Credits less all amounts due and owing to you from Applicant under or in connection with the L/C Documents and the Loan Documents. Further, upon the occurrence and continuance of any Event of Default, you may sell immediately, without demand for payment, advertisement or notice to Applicant, all of which are hereby expressly waived, any and all Collateral, received or to be received, at private sale or public auction or at brokers' board or upon any exchange or otherwise, at your option, in such parcel or parcels, at such times and places, for such prices and upon such terms and conditions as you may deem proper, and you may apply the net proceeds of each sale, together with any sums due from you to Applicant, to the payment of any and all obligations and liabilities due from Applicant to you under or in connection with the L/C Documents and the Loan Documents, all without prejudice to your rights against Applicant with respect to any and all such obligations and liabilities which may be or remain unpaid. If any such sale be at brokers' board or at public auction or upon any exchange, you may yourself be a purchaser at such sale free from any right of redemption, which Applicant hereby expressly waive and release. All your rights and remedies existing under the L/C Documents and the Loan Documents are in addition to, and not exclusive of, any rights or remedies otherwise available to you under applicable law. In addition to any rights now or hereafter granted under applicable law, and not by way of limitation of any such rights, upon the occurrence and continuance of any Event of Default, Applicant hereby authorizes you at any time or from time to time, without notice to Applicant or to any other person (any such notice being hereby expressly waived by Applicant) and to the extent permitted by law, to appropriate and to apply any and all Applicant's deposits (general or special, including, without limitation, indebtedness evidenced by certificates of deposit) with you or elsewhere, whether matured or unmatured, and any other indebtedness at any time held or owing by you to or for Applicant's credit or its account, against and on account of Applicant's obligations and liabilities to you under or in connection with any of the L/C Documents or the Loan Documents, irrespective of whether or not you shall have made any demand for payment of any or all such obligations and liabilities or declared any or all such obligations and liabilities to be due and payable, and although any or all such obligations and liabilities shall be contingent or unmatured. SECTION 15. WAIVERS. No delay, extension of time, renewal, compromise or other indulgence which may occur or be granted by you under any L/C Document or any Loan Document shall impair your rights or powers under this Agreement or any Application. You shall not be deemed to have waived any of your rights under this Agreement or any Application unless such waiver is in writing signed by your authorized representative. No such waiver, unless expressly provided therein, shall be effective as to any transactions which occur subsequent to the date of such waiver or as to the continuance of any Event of Default after such waiver. No amendment or modification of this Agreement shall be effective unless it is in writing signed by Applicant's and your authorized representative(s). SECTION 16. AMENDMENTS AND MODIFICATIONS TO CREDITS. At Applicant's verbal or written request, or with Applicant's verbal or written consent, and without extinguishing or otherwise affecting Applicant's obligations under this Agreement or any Loan Document, you may with respect to any Credit, in writing or by any other action, but you will not be obligated to, (a) increase the amount of such Credit, (b) extend the time for, and amend or modify the terms and conditions governing, the making and honoring of any Demand or Document or any other terms and conditions of such Credit, or (c) waive the failure of any Demand or Document to comply with the terms of such Credit, and any Collateral pledged or granted to you in connection with such Credit will secure Applicant's obligations to you with respect to such Credit as amended, modified or waived. No amendment to, or modification of, the terms of any Credit will become effective if the Beneficiary of such Credit or any confirming bank objects to such amendment or modification. If any Credit is amended or modified in accordance with this Section, Applicant shall be bound by, and obligated under, the provisions of this Agreement with respect to such Credit as so amended or modified, and any action taken by you or any advising, confirming, negotiating, paying or other bank in accordance with such amendment or modification. SECTION 17. SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement and each Application shall bind Applicant's heirs, executors, administrators, successors and assigns, and all rights, benefits and privileges conferred on you under or in connection with each L/C Document and each Loan Document shall be and hereby are extended to, conferred upon and may be enforced by your successors and assigns. Applicant will not assign this Agreement or Applicant's obligations or liabilities to you under or in connection with any L/C Document or Loan Document to any person or entity without your prior written approval. SECTION 18. GOVERNING LAW. This Agreement and each Application, and Applicant's and your performance under this Agreement and each Application, shall be governed by and be construed in accordance with the laws of the State of California. Unless you otherwise specifically agree in writing, each Credit, the opening of each Credit, the performance by you under each Credit, and the performance by the Beneficiary and any advising, confirming, negotiating, paying or other bank under each Credit, shall be governed by and be construed in accordance with the UCP in force on the date of the issuance of each Credit. In the event that any Credit issued pursuant to this Agreement states that it is governed by the laws of a jurisdiction other than the State of California, then your performance under such Credit shall be governed. SECTION 19. JURISDICTION AND SERVICE OF PROCESS. Any suit, action or proceeding against Applicant under or with respect to any L/C Document may, at your sole option, be brought in (a) the courts of the State of California, (b) the United States District Courts in California, (c) the courts of Applicant's jurisdiction of incorporation or principal office, or (d) the courts of the jurisdiction where any Beneficiary, any advising, confirming, negotiating, paying or other bank, or any other person or entity has brought any suit, action or proceeding against you with respect to any Credit or any Demand, and Applicant hereby submits to the nonexclusive jurisdiction of such courts for the purpose of any such suit, action, proceeding or judgment and waives any other preferential jurisdiction by reason of domicile. Applicant will accept joinder in any suit, action or proceeding brought in any court or jurisdiction against you by any Beneficiary, any advising, confirming, negotiating, paying or other bank or any other person or entity with respect to any Credit or any Demand. Applicant irrevocably waives trial by jury and any objection, including, without limitation, any objection of the laying of venue or any objection based on the grounds of forum non conveniens, which Applicant may now or hereafter have to the bringing of any such action or proceeding. Applicant further waives any right to transfer or change the venue of any suit, action or proceeding brought against Applicant by you under or in connection with any L/C Document. Applicant irrevocably consents to the service of process in any action or proceeding in any court by the mailing of copies thereof by registered or certified mail, postage prepaid, to Applicant at its address specified next to its signature on this Agreement or at such other address as Applicant shall have notified to you in writing, such service to be effective ten (10) days after such mailing. SECTION 20. JOINT APPLICANTS. If this Agreement is signed by more than one person and/or entity as an Applicant, this Agreement and the Applications shall be the joint and several agreement of all such persons and/or entities and that all references to "Applicant" or "Applicant's" in this Agreement and the Applications shall refer to all such persons and/or entities jointly and severally. SECTION 21. SEVERABILITY. Any provision of any L/C Document which is prohibited or unenforceable in any jurisdiction shall be, only as to such jurisdiction, ineffective to the extent of such prohibition or unenforceability, but all the remaining provisions of such L/C Document and all the other L/C Documents shall remain valid. SECTION 22. HEADINGS. The headings used in this Agreement are for convenience of reference only and shall not define or limit the provisions of this Agreement. SECTION 23. CREDIT AGREEMENT. This Agreement and any related Application have been entered into pursuant to the Secured Credit Agreement dated August 14, 2003, among Applicant, as Borrower, Wells Fargo, as Agent, and other financial institutions (the "Credit Agreement"). For so long as the Credit Agreement remains in effect, the provisions of Sections 4, 5, 6, 9, 10, 13, 14, and 15 of this Agreement shall not be effective. In the event that the Credit Agreement is terminated and any Credit remains outstanding, then the provisions of Sections 4, 5, 6, 9, 10, 13, 14, and 15 hereof shall thereafter apply to all outstanding Credits until the obligations of the Applicant thereunder have been satisfied in full. ADDITIONAL PROVISIONS APPLICABLE IF THE APPLICANT IS LOCATED IN OREGON ---------------------------------------------------------------------- Section Oregon 1. UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY A LENDER AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION, AND BE SIGNED BY THE LENDER TO BE ENFORCEABLE. ADDITIONAL PROVISIONS APPLICABLE IF THE APPLICANT IS LOCATED IN WASHINGTON -------------------------------------------------------------------------- Section Washington 1. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW. ADDITIONAL PROVISIONS APPLICABLE IF THE APPLICANT IS LOCATED IN NEBRASKA ------------------------------------------------------------------------ Section Nebraska 1. ENFORCEABILITY OF WRITTEN TERMS ONLY. A CREDIT AGREEMENT MUST BE IN WRITING TO BE ENFORCEABLE UNDER NEBRASKA LAW. TO PROTECT THE PARTIES FROM ANY MISUNDERSTANDINGS OR DISAPPOINTMENTS, ANY CONTRACT, PROMISE, UNDERTAKING OR OFFER TO FOREBEAR REPAYMENT OF MONEY OR TO MAKE ANY OTHER FINANCIAL ACCOMMODATION IN CONNECTION WITH THIS LOAN OF MONEY OR GRANT OR EXTENSION OF CREDIT, OR ANY AMENDMENT OF, CANCELLATION OF, WAIVER OF, OR SUBSTITUTION FOR ANY OR ALL OF THE TERMS OR PROVISIONS OF ANY INSTRUMENT OR DOCUMENT EXECUTED IN CONNECTION WITH THIS LOAN OF MONEY OR GRANT OR EXTENSION OF CREDIT, MUST BE IN WRITING TO BE EFFECTIVE. ADDITIONAL PROVISIONS APPLICABLE IF THE APPLICANT IS LOCATED IN IOWA -------------------------------------------------------------------- Section Iowa 1. IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT. ADDITIONAL PROVISIONS APPLICABLE IF APPLICANT IS LOCATED IN MISSOURI -------------------------------------------------------------------- ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBT ARE NOT ENFORCEABLE REGARDLESS OF LEGAL THEORY UPON WHICH IT IS BASED THAT IS IN ANY WAY RELATED TO THIS AGREEMENT. TO PROTECT YOU (BORROWER) AND US (LENDERS AND AGENT) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENT WE REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS WE MAY LATER AGREE IN WRITING TO MODIFY IT. Section Iowa 2. By signing this Agreement, Applicant acknowledges receipt of a copy of this Agreement.
This Agreement is signed by Applicant's duly authorized representative or representatives on the date specified below. ------------------------------------------------ ------------------------------------------------- [Applicant's Name] [Applicant's Name] By: By: ------------------------------------------------ ------------------------------------------------- Title: Title: ------------------------------------------------ ------------------------------------------------- ------------------------------------------------ ------------------------------------------------- Signature Signature Address: Address: ------------------------------------------------ ------------------------------------------------- ------------------------------------------------ ------------------------------------------------- ------------------------------------------------ ------------------------------------------------- Date: Date: ------------------------------------------------ -------------------------------------------------
EXHIBIT E REVOLVING NOTE $_________________ St. Louis, Missouri August ____, 2005 For value received, the undersigned FIRST BANKS, INC., a Missouri corporation (the "Borrower"), hereby promises to pay on the Revolving Credit Termination Date (as defined in the Credit Agreement, defined below), to the order of _____________, a _____________ (the "Lender"), at the office of Wells Fargo Bank, National Association, as agent (the "Agent") at Sixth Street and Marquette Avenue, Minneapolis, Minnesota, or at any other place designated at any time in accordance with the Credit Agreement (as hereinafter defined), in lawful money of the United States of America and in immediately available funds, the principal sum of _______________ Dollars ($______________) or, if less, the aggregate unpaid principal amount of all Revolving Loans, as defined in the Credit Agreement, made by the Lender to the Borrower under the Credit Agreement together with interest on the principal amount hereunder remaining unpaid from time to time (the "Principal Balance"), computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate determined from time to time under the Amended and Restated Credit Agreement dated August 11, 2005 (as amended, supplemented or restated from time to time, the "Credit Agreement") by and among the Borrower, the Lenders from time to time party thereto and Wells Fargo Bank, National Association, as Agent for the Lenders thereunder. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is a "Revolving Note" referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the several security agreements delivered pursuant to the Credit Agreement, and may now or hereafter be secured by one or more other security agreements or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including reasonable attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. FIRST BANKS, INC. By ___________________________________ Its _______________________________ EXHIBIT F SAN FRANCISCO COMPANY GUARANTY August _____, 2005 This Guaranty is made as of August ____, 2005 by the undersigned, THE SAN FRANCISCO COMPANY, a Delaware corporation, in favor of WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association, as Agent for the "Lenders" pursuant to the Secured Credit Agreement described below (the "Agent"). RECITALS First Banks, Inc. (the "Borrower"), the Agent and certain financial institutions have executed an Amended and Restated Secured Credit Agreement dated as of August 11, 2005, (the "Credit Agreement"), pursuant to which such financial institutions (the "Lenders") have agreed to lend up to $115,000,000 to the Borrower and pursuant to which the Agent has agreed to issue up to $7,500,000 in face amount of standby letters of credit for the account of the Borrower. One condition to the Lenders' and Agent's commitment under the Credit Agreement is that the undersigned execute, deliver and perform this Guaranty, thereby guaranteeing the payment and performance of all debts, liabilities and obligations of the Borrower to the Agent and the Lenders arising out of the Credit Agreement and any extensions, renewals or replacements thereof (the "Indebtedness"). Now, therefore, in consideration of the premises, the undersigned hereby agrees as follows: 1. No act or thing need occur to establish the liability of the undersigned hereunder, and no act or thing, except full payment and discharge of all Indebtedness, shall in any way exonerate the undersigned or modify, reduce, limit, or release the liability of the undersigned hereunder. 2. This is an absolute, unconditional and continuing guaranty of payment of the Indebtedness and shall continue to be in force and be binding upon the undersigned, whether or not all Indebtedness is paid in full, until this Guaranty is revoked prospectively as to future transactions, by written notice actually received by the Agent, and such revocation shall not be effective as to Indebtedness existing or committed for at the time of actual receipt of such notice by the Agent, or as to any renewals, extensions and refinancings thereof. 3. If the undersigned shall be dissolved or shall be or become insolvent then the Agent shall have the right to declare immediately due and payable, and the undersigned will forthwith pay to the Agent, the full amount of all Indebtedness, whether due and payable or unmatured. If the undersigned voluntarily commences or there is commenced involuntarily against the undersigned a case under the United States Bankruptcy Code, the full amount of all Indebtedness, whether due and payable or unmatured, shall be immediately due and payable without demand or notice thereof. 4. The undersigned shall be liable for all Indebtedness, without any limitation as to amount, plus accrued interest thereon and all attorneys' fees, collection costs and enforcement expenses referable thereto. Indebtedness may be created and continued in any amount, whether or not in excess of such principal amount, without affecting or impairing the liability of the undersigned hereunder. The Agent may apply any sums received by or available to the Agent on account of the Indebtedness from Borrower or any other person (except the undersigned), from their properties, out of any collateral security or from any other source to payment of the excess. Such application of receipts shall not reduce, affect or impair the liability of the undersigned hereunder. 5. The undersigned will not exercise or enforce any right of contribution, reimbursement, recourse or subrogation available to the undersigned against any person liable to payment of the Indebtedness, or as to any collateral security therefor, unless and until all of the Indebtedness shall have been fully paid and discharged. 6. The undersigned will pay or reimburse the Agent for all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Agent in connection with the protection, defense or enforcement of this Guaranty in any litigation or bankruptcy or insolvency proceedings. 7. Whether or not any existing relationship between the undersigned and Borrower has been changed or ended and whether or not this Guaranty has been revoked, the Agent may, but shall not be obligated to, enter into transactions resulting in the creation or continuance of Indebtedness, without any consent or approval by the undersigned and without any notice to the undersigned. The liability of the undersigned shall not be affected or impaired by any of the following acts or things (which the Agent is expressly authorized to do, omit or suffer from time to time, both before and after revocation of this Guaranty, without notice to or approval by the undersigned): (i) any acceptance of collateral security, guarantors, accommodation parties or sureties for any or all Indebtedness; (ii) any one or more extensions or renewals of Indebtedness (whether or not for longer than the original period) or any modification of the interest rates, maturities or other contractual terms applicable to any Indebtedness; (iii) any waiver or indulgence granted to Borrower, any delay or lack of diligence in the enforcement of Indebtedness, or any failure to institute proceedings, file a claim, give any required notices or otherwise protect any Indebtedness, (iv) any full or partial release of, settlement with, or agreement not to sue, Borrower or any other guarantor or other person liable in respect of any Indebtedness; (v) any discharge of any evidence of Indebtedness or the acceptance of any instrument in renewal thereof or substitution therefor; (vi) any failure to obtain collateral security (including rights of setoff) for Indebtedness, or to see to the proper or sufficient creation and perfection thereof, or to establish the priority thereof, or to protect, insure, or enforce any collateral security; or any modification, substitution, discharge, impairment, or loss of any collateral security; (vii) any foreclosure or enforcement of any collateral security; (viii) any transfer of any Indebtedness or any evidence thereof; (ix) any order of application of any payments or credits upon Indebtedness; (x) any election by the Agent under ss. 1111(b)(2) of the United States Bankruptcy Code. 8. The undersigned waives any and all defenses, claims and discharges of Borrower, or any other obligor, pertaining to Indebtedness, except the defense of discharge by payment in full. Without limiting the generality of the foregoing, the undersigned will not assert, plead or enforce against the Agent any defense of waiver, release, discharge in bankruptcy, statute of limitations, res judicata, statute of frauds, anti-deficiency statute, fraud, incapacity, minority, usury, illegality or unenforceability which may be available to Borrower or any other person liable in respect of any Indebtedness, or any setoff available against the Agent to Borrower or any such other person, whether or not on account of a related transaction. The undersigned expressly agrees that the undersigned shall be and remain liable for any deficiency remaining after foreclosure of any mortgage or security interest securing Indebtedness, whether or not the liability of Borrower or any other obligor for such deficiency is discharged pursuant to statute or judicial decision. 9. The undersigned waives presentment, demand for payment, notice of dishonor or nonpayment, and protest of any instrument evidencing Indebtedness. The Agent shall not be required first to resort for payment of the Indebtedness to Borrower or other persons or their properties, or first to enforce, realize upon or exhaust any collateral security for Indebtedness, before enforcing this Guaranty. 10. If any payment applied by the Agent to Indebtedness is thereafter set aside, recovered, rescinded or required to be returned for any reason (including, without limitation, the bankruptcy, insolvency or reorganization of Borrower or any other obligor), the Indebtedness to which such payment was applied shall for the purposes of this Guaranty be deemed to have continued in existence, notwithstanding such application, and this Guaranty shall be enforceable as to such Indebtedness as fully as if such application had never been made. 11. The liability of the undersigned under this Guaranty is in addition to and shall be cumulative with all other liabilities of the undersigned to the undersigned as guarantor or otherwise, without any limitation as to amount, unless the instrument or agreement evidencing or creating such other liability specifically provides to the contrary. 12. This Guaranty shall be effective upon delivery to the Agent, without further act, condition or acceptance by the Agent, shall be binding upon the undersigned and the successors and assigns of the undersigned and shall inure to the benefit of the Agent and the Lenders and their respective participants, successors and assigns. Any invalidity or unenforceability of any provision or application of this Guaranty shall not affect other lawful provisions and application hereof, and to this end the provisions of this Guaranty are declared to be severable. This Guaranty may not be waived, modified, amended, terminated, released or otherwise changed except by a writing signed by the undersigned and the Agent. This Guaranty shall be governed by the laws of the State of Missouri. The undersigned waives notice of the Agent's acceptance hereof and waives the right to a trial by jury in any action based on or pertaining to this Guaranty. 13. This Guaranty, and each and all of the undersigned's obligations hereunder, is secured by that certain San Francisco Company Security Agreement of even date herewith, as hereafter amended, modified and supplemented and may now be secured by one or more other security agreements or other instruments or agreements. In witness whereof, the undersigned has executed this Guaranty as of the day and year first above written. THE SAN FRANCISCO COMPANY By ____________________________________ Its ________________________________ EXHIBIT G SAN FRANCISCO COMPANY SECURITY AGREEMENT This Agreement is made as of August _____, 2005, by and between THE SAN FRANCISCO COMPANY, a Delaware Corporation ("Debtor") and WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association, as Agent for the "Lenders" pursuant to the Secured Credit Agreement described below ("Secured Party"). RECITALS First Banks, Inc., a Missouri corporation (the "Borrower"), Secured Party and certain financial institutions have executed an Amended and Restated Secured Credit Agreement dated as of August 11, 2005, (the "Credit Agreement"), pursuant to which such financial institutions (the "Lenders") have agreed to lend up to $115,000,000 to Borrower and pursuant to which Secured Party has agreed to issue up to $7,500,000 in face amount of standby letters of credit for the account of Borrower. One condition to the Lenders' and Secured Party's commitments under the Credit Agreement is that Debtor execute, deliver and perform this Agreement, thereby granting a security interest to Secured Party, as agent for the Lenders, in the Collateral described herein for the purpose of securing all "Indebtedness", as that term is defined in that certain Guaranty of even date herewith given by Debtor for the benefit of Secured Party (the "Guaranty"). Now, therefore, in consideration of the premises and the mutual agreements herein set forth, the parties hereto hereby agree as follows: 1. Security Interest and Collateral. To secure the prompt and complete payment and performance of both said Indebtedness and any and all obligations of Debtor arising under or on account of this Agreement (collectively the "Secured Obligations"), Debtor hereby grants Secured Party (for its own account and as agent for the Lenders) a security interest (the "Security Interest") in (i) all of the capital stock of First Bank, a Missouri state bank, owned by Debtor, and (ii) any capital stock that Debtor may hereafter acquire and deliver to Secured Party pursuant to Section 8.8 of the Credit Agreement, and (iii) all proceeds of such capital stock and all other rights in connection with such property (collectively the "Collateral"). 2. Representations, Warranties and Covenants. Debtor represents, warrants and covenants that: (a) Debtor will join with Secured Party in taking any action required by Secured Party in order to perfect the Security Interest and to protect the rights and priorities of Secured Party with respect to the Collateral. To that end, Debtor has delivered to Secured Party certificates representing all of the shares of capital stock constituting Collateral and executed and delivered one blank stock power for each such certificate. Debtor will, at Secured Party's request at any one or more times (i) duly endorse, in blank, each and every additional security certificate and instrument constituting Collateral by signing on such certificate or instrument or by signing a separate document of assignment or transfer and delivery to Secured Party each and every such additional security certificate and instrument; (ii) join with Secured Party in executing any instructions or agreements with securities intermediaries for the purpose of obtaining control of any investment property that may hereafter constitute Collateral; and (iii) instruct the issuer of any security that may hereafter constitute Collateral to register such security in the name of Secured Party. (b) Debtor is the owner of the Collateral free and clear of all liens, encumbrances, security interests and restrictions except the Security Interest and any restrictive legend appearing on any security certificate or any instrument constituting Collateral. (c) Debtor will keep the Collateral free and clear of all liens, encumbrances and security interests, except the Security Interest. (d) Debtor will pay, when due, all taxes and other governmental charges levied or assessed upon or against any Collateral. (e) Debtor will upon receipt deliver to Secured Party all investment property distributed on account of Collateral, such as stock dividends and securities resulting from stock splits, reorganizations and recapitalizations. The Security Interest shall attach to all such proceeds. 3. Events of Default. The occurrence of any Event of Default under the Credit Agreement shall be an Event of Default hereunder. 4. Remedies Upon Event of Default. Upon the occurrence of an Event of Default and during the continuance thereof, Secured Party may exercise any one or more of the rights and remedies specified in the Credit Agreement or in the Guaranty, and also any one or more of the following rights or remedies: (i) notify the obligor on or issuer of any Collateral or any securities intermediary to make payment to Secured Party of any amounts due or distributable on any Collateral, (ii) receive and keep in its possession or under its control subject to the Security Interest all proceeds of Collateral, except that any money received from the Collateral may, at Secured Party's option, be applied in reduction of the Secured Obligations; (iii) exercise all voting and other rights as a holder of any Collateral; (iv) exercise and enforce any or all rights and remedies available upon default to a secured party under the Uniform Commercial Code, including the right to (A) order any securities intermediary to sell any Collateral on any established market or over the counter or to cause any Collateral to be redeemed; (B) give any transfer or redemption order to any issuer of Collateral; or (C) offer and sell Collateral privately to purchasers who will agree to take the Collateral for investment and not with a view to distribution and who will agree to the imposition of restrictive legends on any certificates representing Collateral, and the right to arrange for a sale which would otherwise qualify as exempt from registration under the Securities Act of 1933; and if notice to Debtor of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given at least 10 calendar days prior to the date of intended disposition or other action; and (v) exercise or enforce any or all other rights or remedies available to Secured Party by law or agreement against any Collateral, against Debtor or against any other person or property. 5. Secured Party's Duties. Secured Party's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if Secured Party exercises reasonable care in physically safekeeping such Collateral, or in the case of Collateral in the custody or possession of a securities intermediary or other third person, exercises reasonable care in the selection of the securities intermediary or other third person and Secured Party need not otherwise preserve, protect, insure or care for any Collateral. Secured Party shall not be obligated to preserve any rights Debtor may have against prior parties, to exercise at all or in any particular manner any voting rights which may be available with respect to any Collateral, to realize on the Collateral at all or in any particular manner or order, or to apply any cash proceeds of Collateral in any particular order of application. Regardless of the manner in which Secured Party chooses to exercise control over Collateral (whether by possession, by agreement with an issuer or Securities Intermediary, by transferring security entitlements into its own account, or otherwise), Secured Party shall not be deemed to be under any obligation to Debtor, whether as fiduciary, trustee, agent or otherwise, except the duty of good faith, the duties specifically imposed upon Secured Party by this Agreement, and the duties imposed upon it as a secured party by Articles 1, 8 and 9 of the Uniform Commercial Code, as in effect in Missouri. 6. Miscellaneous. Any disposition of Collateral in the manner provided in Section 4 shall be deemed commercially reasonable. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by Secured Party. A waiver signed by Secured Party shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of Secured Party's rights or remedies. All rights and remedies of Secured Party shall be cumulative and may be exercised singularly or concurrently, at Secured Party's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. All notices to be given to Debtor shall be deemed sufficiently given if delivered or mailed by registered or certified mail, postage prepaid, to Debtor at the address set forth following its signature on the signature page of this Agreement or at the most recent address shown on Secured Party's records. Debtor will reimburse Secured Party for all expenses (including reasonable attorneys' fees and legal expenses) incurred by Secured Party in the protection, defense or enforcement of the Security Interest, including expenses incurred in any litigation or bankruptcy or insolvency proceedings. This Agreement shall be binding upon and inure to the benefit of Debtor and Secured Party and their successors and assigns and shall take effect when signed by Debtor and delivered to Secured Party, and Debtor waives notice of Secured Party's acceptance hereof. This Agreement shall be governed by the internal laws of the State of Missouri and, unless the context otherwise requires, all terms used herein which are defined in Articles 1, 8 and 9 of the Uniform Commercial Code, as in effect in Missouri, shall have the meanings therein stated. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Secured Obligations. IN WITNESS WHEREOF, Debtor has executed this Agreement as of the day first above written. THE SAN FRANCISCO COMPANY Address: By - ------------------------------- ---------------------------------------- Its - ------------------------------- ------------------------------------- - ------------------------------- EXHIBIT H TERM LOAN NOTE $_________________ St. Louis, Missouri August ______, 2005 For value received, the undersigned FIRST BANKS, INC., a Missouri corporation (the "Borrower"), hereby promises to pay to the order of _________________, a _____________ (the "Lender"), at the office of Wells Fargo Bank, National Association, as agent (the "Agent") at Sixth Street and Marquette Avenue, Minneapolis, Minnesota, or at any other place designated at any time in accordance with the Credit Agreement (as hereinafter defined), in lawful money of the United States of America and in immediately available funds, the principal sum of _______________ Dollars ($______________) or, if less, the aggregate unpaid principal amount of all Term Loans, as defined in the Credit Agreement, made by the Lender to the Borrower under the Credit Agreement together with interest on the principal amount hereunder remaining unpaid from time to time (the "Principal Balance"), computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate determined from time to time under the Amended and Restated Secured Credit Agreement of even date herewith (as amended, supplemented or restated from time to time) by and among the Borrower, the Lenders from time to time party thereto and Wells Fargo Bank, National Association, as Agent for the Lenders thereunder (the "Credit Agreement"). This Note may be prepaid only in accordance with the Credit Agreement. The Principal Balance shall be repaid in ten (10) equal calendar quarterly installments, beginning March 31, 2006, equal to five percent (5%) of the Principal Balance, with a final payment equal to the entire remaining principal balance (and all accrued and unpaid interest and other sums due under this Agreement) due on the Maturity Date, as defined in the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement. This Note is a "Term Note" referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the several security agreements delivered pursuant to the Credit Agreement, and may now or hereafter be secured by one or more other security agreements or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including reasonable attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. BORROWER: FIRST BANKS, INC. By __________________________________ Its _________________________________ EXHIBIT I NOTICE OF BORROWING Pursuant to Section _______ of that certain Amended and Restated Secured Credit Agreement dated as of August 11, 2005, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "Credit Agreement," the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among First Banks, Inc., a Missouri corporation (the "Borrower"), the financial institutions listed therein as Lenders (the "Lenders"), and Wells Fargo Bank, National Association, as Agent (the "Agent"), this represents Borrower's request to borrow as follows: 1. Date of borrowing: ___________________, _________ ----------------- 2. Amount of borrowing: $___________________ ------------------- 3. Type of Loans: [Revolving Loans] [Term Loan] [Second Term Loan] ------------- 4. Interest rate option: -------------------- [ ] a. Floating Rate Loan(s) [ ] b. Eurodollar Rate Loans with an initial Interest Period of _______ month(s) The proceeds of such Loans are to be deposited in an account designated by the Borrower at First Bank or in such other manner as the Agent and the Borrower may agree in writing. The undersigned officer, to the best of his or her knowledge, and Borrower certify that: (i) With respect to Loans, the representations and warranties contained in the Credit Agreement and the other Loan Documents are true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of the date hereof, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties were true, correct and complete in all material respects on and as of such earlier date; provided, that, if a -------- representation and warranty is qualified as to materiality, with respect to such representation and warranty the materiality qualifier set forth above shall be disregarded for purposes of this condition; (ii) No event has occurred and is continuing or would result from the consummation of the borrowing contemplated hereby that would constitute a Default or an Event of Default. DATED: ___________________ FIRST BANKS, INC. By: -------------------------------- Title: ----------------------------- EXHIBIT J NOTICE OF CONVERSION/CONTINUATION Pursuant to Section ______ of that certain Amended and Restated Secured Credit Agreement dated as of August 11, 2005, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "Credit Agreement," the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among First Banks, Inc., a Missouri corporation (the "Borrower"), the financial institutions listed therein as Lenders, and Wells Fargo Bank, National Association, as Agent (the "Agent"), this represents Borrower's request to convert or continue Loans as follows: 1. Date of conversion/continuation: __________________, _______ 2. Amount of Loans being converted/continued:$___________________ 3. Type of Loans being converted/continued: [Revolving Loans] [Term Loan] [Second Term Loan] 4. Nature of conversion/continuation: [ ] a. Conversion of Floating Rate Loans to Eurodollar Rate Loans [ ] b. Continuation of Eurodollar Rate Loans as such 5. If Loans are being continued as or converted to Eurodollar Rate Loans, the duration of the new Interest Period that commences on the conversion/continuation date: _______________ month(s) In the case of a conversion to or continuation of Eurodollar Rate Loans, the undersigned officer, to the best of his or her knowledge, and Borrower certify that no Default or Event of Default has occurred and is continuing. DATED: ____________________ FIRST BANKS, INC. By: --------------------------------- Title: ------------------------------ EXHIBIT K PERMISSIBLE SECURITIES The following qualify as "Permissible Securities:" Valuation Percentage -------------------- A. Cash 100% B. (x) Negotiable debt obligations issued by the U.S. Treasury Department or the Government National Mortgage Association ("Ginnie Mae"), or (y) mortgage-backed securities issued by Ginnie Mae (but with respect to either (x) or (y) excluding interest only or principal only stripped securities, securities representing residual interests in mortgage pools, and securities that are not listed on a national securities exchange or regularly quoted in a national quotation service) and in each case having a remaining maturity of: (i) less than one year 100% (ii) one year or greater but less than 10 years 98% (iii) ten years or longer 95% C. (x) Negotiable debt obligations issued by the Federal Home Loan Mortgage Association ("Freddie Mac") or (y) mortgage-backed securities issued by Freddie Mac but excluding interest only or principal only stripped securities, securities representing residual interests in mortgage pools, and securities that are not listed on a national securities exchange or regularly quoted in a national quotation service. 95% EXHIBIT L NOTICE OF PERMITTED ACQUISITION This Notice is being submitted on this ___ day of ________, 200__, pursuant to Section 8.9 of the Amended and Restated Secured Credit Agreement dated as of August 11, 2005, (the "Credit Agreement"), by and among Wells Fargo Bank, National Association (the "Agent"), the Lenders that are parties thereto, and First Banks, Inc., as Borrower. Capitalized terms used but not defined herein shall have the meanings set forth in the Credit Agreement. The undersigned officer of the Borrower hereby notifies the Lenders that [the Borrower] [_________ (name of Subsidiary)] has entered into an agreement to purchase [______% of the voting common stock] [all of the assets of the business] [all of the assets of the ______ branch(s)] of ________________________________ (name and organizational details of acquired entity). A brief description of the transaction, including the form of the acquisition, amount and nature of the consideration, and expected date of completion, is attached to this Notice as Annex A. The undersigned officer hereby certifies to the Lenders that: A. The representations and warranties contained in Article VII of the Credit Agreement are correct as of the date hereof and will be correct after giving effect to the proposed acquisition, except to the extent that the same relate specifically to an earlier date; and B. No Default or Event of Default has occurred and is continuing, or will occur as a result of the proposed acquisition. This will confirm that promptly upon request of Agent or any Lender, First Banks, Inc. will provide to the Agent copies of any applications to regulatory agencies submitted in connection with the proposed acquisition. Signed as of the day and year first above written. FIRST BANKS, INC. By --------------------------------- [name and office held] -----END PRIVACY-ENHANCED MESSAGE-----